^S7f 


: 


AMERICAN   CITIZEN   SERIES, 

EDITED    BY 

ALBERT   BUSHNELL    HART,  LL.D. 


PRINCIPLES    OF    ECONOMICS, 

EDWIN   R.  A.  SELIGMAN,  LL.D. 


AMERICAN    CITIZEN   SERIES 


OUTLINE  OF  PRACTICAL  SOCIOLOGY.  With  Special 
Reference  to  American  Conditions.  By  CARROLL  D.  WRIGHT, 
LL.D.,  President  of  Clark  College,  etc.,  etc.  With  Maps  and 
Diagrams. 

FINANCIAL  HISTORY  OF  THE  UNITED  STATES.  By 
DAVIS  R.  DEWEY,  Ph.D.,  Professor  of  Economics  and  Sta- 
tistics, Massachusetts  Institute  of  Technology.  With  18  Charts. 

ACTUAL  GOVERNMENT.  As  Applied  under  American  Con- 
ditions. By  ALBERT  BUSHNELL  HART,  LL.D.,  Professor  of 
History  in  Harvard  University.  With  Illustrations.  Maps,  and 
Diagrams.  « 

CONSTITUTIONAL  LAW  IN  THE  UNITED  STATES. 
By  the  Honorable  EMLIN  McCLAiN,  Judge  of  the  Supreme 
Court,  Iowa.  With  Appendix  of  Documents. 

PRINCIPLES  OF  ECONOMICS.  With  Special  Reference  to 
American  Conditions.  By  EDWIN  R.  A.  SELIGMAN,  PH.D., 
LL.D.,  McVickar  Professor  of  Political  Economy,  Columbia 
University.  With  Maps  and  Charts. 


LONGMANS,    GREEN,    AND    CO. 


Citijeu 


Principles    of   Economics 


WITH  SPECIAL  REFERENCE 
TO  AMERICAN  CONDITIONS 


BY 

EDWIN  R.  A.  SELIGMAN,  LL.D. 
/» 

JScFtcftar  Professor  of  political  (Sconomg, 
(Eolumtta  ©m'bersitg. 

AUTHOR  OF  "ESSAYS  IN  TAXATION,"  "THE  ECONOMIC  INTERPRETATION 
OF  HISTORY,"  ETC.,  ETC. 


' 


LONGMANS,  GREEN,  AND  CO. 

91   AND  93  FIFTH  AVENUE,  NEW  YORK 

LONDON  AND  BOMBAY 

1905. 


/-?/ 


"tot- 


Copyright,  1905, 
BY  LONGMANS,  GREEN,  AND  Co. 


MORSE  STEPHEN* 


THE    UNIVERSITY    PRESS,    CAMBRIDGE,    U.  S.  A. 


Contents 


SUGGESTIONS   FOR   STUDENTS   AND  GENERAL 
REFERENCES 

PAGE 

I.  GENERAL  TREATISES  IN  ENGLISH xvii 

II.  GENERAL  TREATISES  IN  FOREIGN  LANGUAGES    ....       xx 

III.  PERIODICALS xxi 

IV.  DICTIONARIES  AND  CYCLOPEDIAS xxv 

V.   GOVERNMENT  DOCUMENTS 

A.  Local  and  State  Publications xxvi 

B.  National  Departmental  Publications xxviii 

C.  Congressional  Documents xxxiv 

D.  Indexes    . xxxvi 

E.  British  Official  Publications xxxvii 

VI.   SEMI-OFFICIAL  PUBLICATIONS xxxix 

VII.  BIBLIOGRAPHIES  AND  FINDING  LISTS xl 

VIII.   LIST  OF  SELECT  BOOKS  .         xli 


Part  I. 

INTRODUCTION. 

CHAPTER 

I.  FUNDAMENTAL  CONCEPTS. 

1.  References 3 

2.  Economic  Life 3 

3.  Economics  or  Political  Economy  ? *.     .  6 

4.  The  Meaning  of  Wealth 8 

5.  Wealth  and  Man 13 

6.  The  Measure  of  Wealth  —  Income  and  Capital    ...  15 

7.  Wealth,  Money,  and  Property .„  19 

8.  Public  and  Private  Wealth  20 


511404 


vi  Contents  Parts  I.,  II. 

CHAPTER  PAGE 

II.  ECONOMIC  LAW  AND  METHOD. 

9    References 23 

10.    Meaning  of  Economic  Law 23 

n.    Methods  of  Economic  Investigation 27 

12.  Relation  of  Economics  to  Other  Sciences 28 

13.  Relation  of   Economics  to   Politics  and  Other  Moral 

Sciences 30 

14.  Scope  of  Economics ".     .      34 


Part  II. 

ELEMENTS  OF  ECONOMIC  LIFE. 

BOOK   I.  — FOUNDATIONS   OF  ECONOMIC   LIFE. 

III.  THE  NATURAL  ENVIRONMENT. 

15.  References 36 

16.  Climatic  and  Geological  Conditions 36 

17.  The  Flora,  the  Fauna,  and  the  Geographical  Location  .  40 

18.  Changes  in  Environment 42 

19.  Changes  in  Location       45 

IV.  THE  POPULATION. 

20.  References 48 

21.  Density  of  Population 48 

22.  Concentration  of  Population 51 

23.  Distribution  of  Population 53 

24.  Increase  of  Population 55 

25.  Migration  of  Population 59 

26.  The  Law  of  Population 60 

BOOK   II.  — DEVELOPMENT  OF   ECONOMIC  LIFE  AND 

THOUGHT. 
V.  THE  ECONOMIC  STAGES. 

27.  References 66 

28.  Economic  Development 66 

29.  Primitive  Technique 68 

30.  Transition  from  the  Lower  Stages  of  Civilization      .     .  71 

31.  Self-sufficing  or  Isolated  Economy 74 

32.  Trade  or  Commercial  Economy  ...          .....  76 

33.  Capitalist  or  Industrial  Economy    ........  80 


Part  II.  Contents 


Vll 


CHAPTER  PAGE 

VI.  THE  HISTORICAL  FORMS  OF  BUSINESS  ENTERPRISE. 

34.  References 84 

35.  Primitive  Economic  Activity  —  The  Clan 84 

36.  The  Family 86 

37.  Help  or  Hire  System , 89 

38.  Handicraft  System 90 

39.  Domestic  System 92 

40.  Factory  System      . 93 

41.  Associated  and  Corporate  Enterprise 95 

VII.  ECONOMIC  DEVELOPMENT  OF  THE  UNITED  STATES. 

42.  References 99 

43.  Early  Period  of  American  Economic  Life 99 

44.  Growth  of  American  Industry  in  the  Nineteenth  Century  101 

45.  Recent  Development  of  American  Industry     ....  104 

46.  Modern  Problems  of  America 106 

VIII.  DEVELOPMENT  OF  ECONOMIC  THOUGHT. 

47.  References 109 

48.  Economic  Theory  in  Classic  Antiquity 109 

49.  Mediaeval  Economic  Theory 112 

50.  The  Mercantile  Doctrine 115 

51.  Adam  Smith  and  the  Physiocrats 118 

52.  Ricardo  and  Modern  Economics 121 


BOOK   III.  — CONDITIONS   OF  ECONOMIC   LIFE. 

IX.   PRIVATE  PROPERTY. 

53.  References 125 

54.  Origin  of  Private  Property 125 

55.  Growth  of  Property  in  Land 128 

56.  Theories  of  Private  Property 131 

57.  Limits  of  Private  Property 134 

58.  Content  of  Property  Rights 136 

X.   COMPETITION. 

59.  References 139 

60.  Nature  of  Competition 139 

61.  Forms  of  Competition 141 

62.  Dangers  of  Competition 145 

63.  Limits  of  Competition 147 

64.  Substitutes  for  Competition 150 


viii  Contents  Parts  II. ,  III. 

CHAPTER  PAGE 

XI.    FREEDOM. 

65.  References 154 

66.  Origin  and  Growth  of  Slavery 154 

67.  Decay  and  Disappearance  of  Slavery 158 

68.  Liberty  of  Economic  Action 163 

69.  Various  Kinds  of  Economic  Freedom 165 

70.  Individual  Liberty  as  a  Social  Concept 170 


Part  III. 

STRUCTURE    AND    PROCESS    OF    ECONOMIC    LIFE. 
BOOK   I.  — VALUE:   GENERAL  PRINCIPLES. 

XII.  THE  MEANING  OF  VALUE. 

71.  References 173 

72.  Original  Meaning  of  Value 173 

73.  Marginal  Utility —  Law  of  Diminishing  Utility    .     .     .  175 

74.  Individual  and  Social  Value 179 

75.  Value  in  Exchange 182 

76.  Value  and  Price 184 

77.  Value  and  Marginal  Increments  of  Wealth 185 

XIII.  THE  MEASURE  OF  VALUE. 

78.  References 189 

79.  Meaning  of  Cost 189 

80.  Individual  and  Social  Cost 192 

81.  Cost  and  Surplus 194 

82.  Cost  and  Utility 198 

83.  Social  Surplus  and  Progress 201 

XIV.  THE  CAPITALIZATION  OF  VALUE. 

84.  References 204 

85.  Value  and  Rent 204 

86.  Law  of  Depreciation 206 

87.  Law  of  Future  Estimates 209 

88.  Law  of  Diminishing  Returns 211 

89.  Forms  of  Value 214 

90.  Value  as  a  Differential 217 

91.  Relation  of  Rental  and  Capital  Values 219 


Part  in.                        Contents  ix 

CHAPTER  PAGE 

XV.   DETERMINATION  OF  MARKET  VALUE. 

92.  References 222 

93.  Demand  and  Supply 222 

94.  Market  and  Normal  Price 223 

95.  Conditions  of  Exchange  — Law  of  Comparative  Utilities 

and  Comparative  Costs 225 

96.  Rate  of  Exchange  —  Barter 226 

97.  One  Seller  and  One  Buyer      . 228 

98.  Monopoly 230 

99.  Competition 233 

100.  Conclusions 234 

XVI.  DETERMINATION  OF  NORMAL  VALUE. 

101.  References 239 

102.  Normal  Demand  —  Elasticity  of  Demand 239 

103.  Normal  Supply  —  Cost  of  Production 242 

104.  Law  of  Marginal  or  Maximum  Cost 245 

105.  Law  of  Minimum  Cost 247 

106.  Elasticity  of  Supply  —  Law  of  Varying  Cost     ....  249 

107.  Law  of  Joint  Cost 251 

108.  Equilibrium  of  Normal  Demand  and  Normal  Supply     .  253 

109.  Influence  of  Normal  Price  upon  Market  Price  ....  254 
no.   Normal  Monopoly  Value 255 

XVII.  THE  GENERAL  LAW  OF  VALUE. 

in.   References 260 

112.  Value  and  Cost  of  Production 260 

113.  Value  and  Efficiency 262 

114.  Efficiency  and  Capitalization 266 

115.  Valuation  and  Taxation -.  267 

116.  Valuation  and  Regulation 271 

117.  Valuation  and  Investment 273 


BOOK   II.  — VALUE   AND    PRODUCTION. 

• 

XVIII.   CHARACTER  AND  FACTORS  OF  PRODUCTION. 

118.  References 275 

119.  Production  :  Its  Meaning  and  Relation  to  Consumption  275 

1 20.  Kinds  of  Production 278 

121.  Factors  of  Production 280 

122.  Production  and  the  Producer  282 


x                                 Contents                         Part  III. 

CHAPTER  PAGE 

XIX.  LABOR. 

123.  References 285 

124.  Meaning  of  Labor 285 

125.  Cost  of  Labor 286 

126.  Efficiency  of  Labor 289 

127.  Division  of  Labor  —  Nature  and  Advantages  .               .  290 

1 28.  Division  of  Labor  —  Defects 294 

129.  Combination  of  Labor 296 

130.  Supply  of  Labor 298 

XX.   LAND. 

131.  References 300 

132.  Land  as  a  Separate  Factor  of  Production 300 

133.  Fertility  of  Land 303 

134.  Situation  of  Land 306 

135.  Cultivation  of  Land 309 

XXI.  CAPITAL. 

136.  References 313 

137.  Kinds  of  Capital 313 

138.  Function  of  Capital 316 

139.  Creation  and  Growth  of  Capital 319 

140.  Nature  and  Influence  of  Capital 321 

141.  Investment  of  Capital 324 

XXII.  ENTERPRISE  —  THE  CONCENTRATION  OF  PRODUCTION. 

142.  References 329 

143.  The  Meaning  of  Concentration 329 

144.  Large  Scale  Production 331 

145.  Large  Scale  Agriculture 334 

146.  Consolidation  and  Integration  of  Production    ....  337 

147.  Growth  of  Combination 340 

148.  Effects  of  Combination 344 

149.  Limits  of  Combination 347 


BOOK   III.  — VALUE   AND- DISTRIBUTION. 

XXIII.  PROFITS. 

150.  References 351 

151.  The  Shares  in  Distribution 351 

152.  Ordinary  Profits 353 

153.  Aleatory  Profits      . 357 


Part  III.                       Contents  xi 

CHAPTER  PAGE 

XXIII.  PROFITS  (Continued}. 

154.  Speculative  Profits :  Nature 359 

155.  Speculative  Profits :  Function 363 

156.  Monopoly  Profits 366 

157.  Regulation  and  Justification  of  Profits 368 

XXIV.  RENT. 

158.  References 371 

159.  Nature  of  Rent 371 

1 60.  Relation  of  Land  Rent  to  Other  Rents 373 

161.  Rent  and  Price 376 

162.  Growth  of  Land  Rent 379 

163.  Land  Rent  and  Land  Tenure 383 

164.  Justification  of  Land  Rent 388 

XXV.  INTEREST. 

165.  References 392 

166.  Nature  of  Interest 392 

167.  Interest  and  Forbearance 396 

1 68.  Interest  and  Productivity 399 

169.  Course  of  Interest 403 

170.  Tendency  of  Interest  to  a  Minimum 405 

171.  Regulation  of  Interest 408 

XXVI.  WAGES. 

172.  References 411 

173.  Nature  of  Wages 411 

174.  Wages  and  Cost 414 

175.  Wages  and  Efficiency 416 

176.  Rate  of  Wages 419 

177.  Course  of  Wages 420 

178.  Variations  in  Wages 422 

179.  Wages  and  Profits 427 

XXVII.  WAGES.  — THE  LABOR  PROBLEM. 

180.  References 429 

181.  Labor  Legislation 430 

182.  Labor  Organization  :  Object  and  Functions      ....  434 

183.  Labor  Organization :  Methods 439 

184.  Profit  Sharing  and  Co-operation 442 

185.  Arbitration  and  Conciliation 445 


xii  Contents  Part  III. 

BOOK   IV.  — VALUE   AND   EXCHANGE. 

CHAPTER  PAGE 

XXVIII.  MONEY. 

186.  References 448 

187.  Functions  of  Money 449 

188.  Kinds  of  Money 451 

189.  Value  of  Money :  The  Quantity  Theory        454 

190.  Value  of  Money: 'Cost  of  Production 457 

191.  Stability  of  Money 460 

192.  Distribution  of  Money 467 

XXIX.  CREDIT. 

193.  References 469 

194.  Nature  of  Credit 469 

195.  Credit  and  Banking 472 

196.  Credit  and  Prices 476 

197.  Credit  and  Currency 478 

198.  Credit  and  Crises 487 

XXX.  INTERNATIONAL  TRADE. 

199.  Refeiences 491 

200.  Basis  of  International  Trade 491 

201.  Rate  of  International  Exchange 497 

202.  Growth  of  Free  Trade 500 

203.  The  Argument  for  Protection 505 

204.  The  Argument  for  Free  Trade 510 

205.  Conclusion 512 

XXXI.  TRANSPORTATION. 

206.  References 517 

207.  Transmission  of  Intelligence  —  The  Post-Office    ...  517 

208.  Railway  Development 520 

209.  Nature  of  Railway  Business 524 

210.  Principle  of  Railway  Charges 528 

211.  Classification 532 

212.  Personal  Discrimination 535 

213.  Local  Discrimination 536 

214.  Railway  Regulation 541 

XXXII.  INSURANCE. 

215.  References 545 

216.  Nature  of  Insurance 545 

217.  Growth  of  Insurance 548 

218.  Theory  of  Insurance 553 

219.  Methods  and  Regulation  of  Insurance 556 


Part  IV.  Contents  xiii 


Part  IV. 


CONCLUSION. 

CHAPTER  PACK 

XXXIII.  GOVERNMENT  AND  BUSINESS. 

220.  References 559 

221.  Socialism 559 

222.  Development  of  Public  Ownership 562 

223.  Conditions  of  Public  Ownership 566 

224.  Municipal  Monopolies 570 

225.  Government  Regulation 573 

226.  Bounties  and  Subsidies 576 

XXXIV.  POVERTY  AND  PROGRESS. 

227.  References 579 

228.  Luxury '580 

229.  The  Facts  of  Poverty 584 

.  230.  The  Causes  of  Poverty 588 

231.  Relief  of  Poverty 591 

232.  Prevention  of  Poverty 594 

. .  s—  233.   The  Future  of  Economic  Life ,  .    .     .    .  597 

234.   Role  of  Economics 601 

INDEX    ....-.' 603 


Maps  and  Diagrams 

PAGE 

Distribution  of  Population  in  1900    .     .     .     colored,     facing    50 
Number  of  Inhabitants  to  the  Square  Mile, 

by  States  and  Territories "  52 

Population  according  to  Age  Distribution 54 

Foreign  Immigration  to  the  United  States, 

1840-1901 .following    58 

Increase  of  Population  in  Principal  Coun- 
tries of  Europe facing    59 

Population : 

(r)  Total  Foreign  Born  at  each  Census -\ 

(2)   Proportion  each  of  leading  nation-  >  colored,  following    60 

alities  and  foreign  born       .     .     . ) 
Constituents  of  the  Population  of  States 

and  Territories,  1900 colored,         "  62 

Production  of  Corn     >  _  fad       IQ2 

Production  of  Wheat) 

Production  of  Oats    \  u 

Production  of  Cotton  > 

Capital  Invested  at  each  Census        >  « 

Average  Number  of  Wage  Earners  > 

Value  of  Products  )  u 

Proportion  of  Wage  Earners  to  Population  ) 

Annual  Production  of  Iron  Ore  in  the  United 

States "       106 

Hand  and  Machine  Labor  Selected  Units  (a)      ...       "       294 
Hand  and  Machine  Labor  Selected  Units  (£)      ...        "       295 

Wages,  Hours  of  Work,  etc. colored,  "      422 

Results  of  Strikes,  etc colored,  "      440 

Relative  Wholesale  and  Retail  Price  of  Food, 

1890-1903 "   458 

Relative  Wholesale  and  Retail  Price  of  Fresh 

Beef,  1890-1903 "      458 


Maps  and  Diagrams  xv 

PAGE 

Relative  Prices  of  Raw  and  Manufactured 

Commodities,  1890-1903 facing  459 

Comparative  Movement  of  Wholesale  Prices, 

1878-1901 "  459 

Production  of  Silver,  1875-1903 "  462 

Production  of  Gold  and  Silver,  1845-1904  ....  "  462 

Production  of  Gold,  1875-1903 "  463 

Bank  Notes,  Paper  Money,  etc.,  1878-1905  ....  "  478 

Merchandise  Exported  and  Imported "  494 

Reduction  of  Freight  Rates,  1867-1900  ....  following  524 
Percent  of  Total  Expenditure,  etc.,  Normal 

Families colored,  facing  584 

Poverty  Chart  (reproduced  by  permission 

from  Rowntree's  "  Poverty  ") 590 


SUGGESTIONS  FOR  STUDENTS  AND 
GENERAL  REFERENCES. 

I.  General  Treatises  in  English. 

OF  the  older  works  the  treatises  of  Adam  Smith  and  of  some 
of  the  so-called  Classical  School  are  still  indispensable  to  stu- 
dents. The  three  founders  are  : 

SMITH,  ADAM.  An  Inquiry  into  the  Nature  and.  Causes  of  the 
Wealth  of  Nations.  (London,  1776;  best  modern  edition,  with 
introduction,  notes,  marginal  summary  and  enlarged  index  by 
Edwin  Cannan,  2  vols.,  1904.) 

MALTHUS,  THOMAS  ROBERT.  An  Essay  on  the  Principle  of 
Population,  or  a  View  of  its  Past  and  Present  Effects  on  Human 
Happiness.  (London,  1798  ;  8th  ed.?  1878.) 

RICARDO,  DAVID.  Principles  of  Political  Economy  and  Taxation. 
(London,  1817.)  — This  work,  together  with  his  other  important 
writings,  has  been  edited  by  J.  R.  McCulloch  in  one  volume 
under  the  title  of  The  Works  of  David  Ricardo  with  a  Notice 
of  the  Life  and  Writings  of  the  Author.  (1846;  frequently 
reprinted  since.) 

The  principal  modern  expounders  of  the  general  system  set 
forth  by  Smith,  Malthus  and  Ricardo  are  : 

MILL,  JOHN  STUART.  Principles  of  Political  Economy  with  some 
of  their  Applications  to  Social  Philosophy.  (London,  1848;  5th 
ed.,  1880.)  —  This  was  the  most  widely  read  work  from  1850  to 
1890. 

SENIOR,  NASSAU  WILLIAM.  Political  Economy.  (London,  1850; 
6th  ed.,  1872.)  —  Acute  and  original. 

CAIRNES,  J.  E.  Some  Leading  Principles  of  Political  Economy 
newly  Expounded.  (London,  1874.)  — Abstract,  but  remarkably 
able. 

b  xvii. 


xviii  Suggestions. 

SIDGWICK,  HENRY.  The  Principles  of  Political  Economy.  (Lon- 
don, 1883.)  —  Critical  and  philosophical,  but  somewhat  remote 
from  actual  life. 

The  reaction  against  the  Classical  School  was  inaugurated  in 
England  by 

JEVONS,  W.  STANLEY.  The  Theory  of  Political  Economy.  (Lon- 
don, 1871  ;  3d  ed.,  1888.)— A  work  of  the  first  magnitude.  The 
same  author's  posthumous  Principles  of  Economics  (London, 
1905)  is  only  a  torso. 

Of  modern  treatises  the  best  are  as  follows  : 

MARSHALL,  ALFRED.  Principles  of  Economics.  (Vol.  I,  London, 
1890;  4th  ed.,  1898.)  —  The  fullest  and  most  elaborate  of  recent 
works. 

PIERSON,  N.  G.  Principles  of  Economics.  (Translated  by  A.  A. 
Wotzel.  Vol.  I,  London,  1902.)  —  Dr.  Pierson  was  formerly 
Prime  Minister  of  the  Netherlands.  A  virile  work,  especially 
strong  in  the  financial  sections.  Vol.  II  may  be  expected  soon. 

NICHOLSON,  J.  SHIELD.  Principles  of  Political  Economy.  (3 
vols.,  London,  1893-1901.)  —  On  the  lines  of  Mill,  but  brought 
down  to  date  and  with  much  historical  material. 

PANTALEONI,  MAFFEO.  Pure  Economics.  (Translated  by  T. 
Boston  Bruce.  London,  1898.)  —  An  acute  and  profound  work 
on  fundamental  principles. 

FLUX,  A.  N.  Economic  Principles.  An  Introductory  Study. 
(London,  1904.)  —  A  solid  production  on  rather  conservative 
lines. 

BOHM-BAWERK,  EUGEN  VON.  The  Positive  Theory  of  Capital. 
(Translated  by  W.  Smart.  London,  1891.) — Professor  Bohm- 
Bawerk  was  formerly  Austrian  Minister  of  Finance. 

WIESER,  FRIEDRICH  VON.  Natural  Value.  (Translated  by 
C.  Malloch,  London,  1893.)  —  This  book  and  the  one  immedi- 
ately preceding  are  the  two  chief  works  of  the  Austrian  School, 
whose  views  are  akin  to  those  of  Jevons. 

Of  American  treatises  the  most  important  are  : 

WALKER,  FRANCIS  A.  Political  Economy.  (New  York,  1883  ; 
3d  ed.,  1888.)  —  Until  recently  the  chief  American  production. 


Treatises  in  English.  xix 

CLARK,  JOHN  B.  The  Distribution  of  Wealth.  (New  York, 
1899.)  —  Although  dealing  nominally  with  only  a  portion  of  the 
subject,  of  fundamental  and  epoch-making  importance. 

HADLEY,  ARTHUR  TWINING.  Economics :  An  Account  of  the 
Relations  between  Private  Property  and  Public  Welfare.  (New 
York,  1896.)  —  Admirably  written,  but  with  a  not  entirely  satis- 
factory arrangement. 

BULLOCK,  CHARLES  JESSE.  Introduction  to  the  Study  of  Eco- 
nomics. (New  York,  1897;  newed.,  1900.)  —  Clear  and  sensible. 

GIDE,  CHARLES  Principles  of  Political  Economy.  (Translated 
by  C.  W.  A.  Veditz.  New  York,  1889;  2d  ed.,  1904.)  — The 
most  widely  read  European  text-book,  with  additional  notes  of 
interest  to  American  students. 

ELY,  RICHARD  T.  Outlines  of  Economics.  (New  York,  1893; 
new  ed.,  1904.)  —  Written  in  conjunction  with  H.  H.  Powers. 
Popular  and  interesting. 

SEAGER,  HENRY  ROGERS.  Introduction  to  Economics.  (New 
York,  1904.) —  Displays  a  firm  grasp  of  theory  and  a  wide  ac- 
quaintance with  facts.  In  many  respects  the  most  available  of 
existing  text-books. 

FETTER,  FRANK  A.  The  Principles  of  Economics.  (New  York, 
1904.) — Novel  and  suggestive. 

During  the  past  few  years  a  number  of  series  for  more  pop- 
ular consumption  have  appeared.  They  are  not  yet  completed, 
and  the  whole  number  of  volumes  is  not  yet  definitely  settled. 
Among  these  are  : 

Appleton's  Business  Series  (New  York,  1901-1905),  with  vol- 
umes entitled  Modern  Industrialism;  Funds  and  their  Uses; 
The  Work  of  Wall  Street;  Trust  Finance;  American  Railway 
Transportation;  The  Modern  Bank;  The  Life  Insurance  Com- 
pany;  Modern  Advertising;  Credit;  Modern  Accounting. 

Methuen's  Books  on  Business  (London,  1902-1905),  with  vol- 
umes on  The  Money  Market;  Ports  and  Docks ;  Railways ;  77ie 
Stock  Exchange;  The  Business  of  Insurance ;  Mining;  and  vari- 
ous industries  like  The  Electrical;  The  Shipbuilding;  The  Agri- 
cultural; The  Brewing;  The  Automobile  Industry. 

Macmillan's  Citizen's  Library  of  Economics,  Politics  and  Soci- 
ology (New  York,  1900-1905),  with  volumes  devoted  to  Economic 


xx  Suggestions. 

Crises ;  Monopolies  and  Trusts  ;  Irrigation  Institutions ;  Rail- 
way Legislation;  Money;  Labor  Problems;  The  Economics  of 
Agriculture ;  The  Economics  of  Distribution;  The  Evolution  of 
Industrial  Society  and  the  like. 

The  American  Citizen  Series  (New  York,  1900-1905)  includes, 
besides  this  volume,  books  on  Elements  of  Practical  Sociology ; 
Actual  Government;  Financial  History  of  the  United  States ; 
and  a  volume  (announced)  on  Problems  of  Transportation. 

Worthy  of  mention  are  two  recent  works  on  modern  business  : 

HATFIELD,  H.  R.,  ed.  Lectures  on  Commerce  (Chicago,  1904). 
For  American  conditions. 

ASHLEY,  W.  J.,  ed.  British  Industries,  a  Series  of  General 
Reviews  for  Business  Men  and  Students  (London,  1903).  For 
English  conditions. 

The  more  important  works  on  special  topics  will  be  found  in 
the  References  at  the  head  of  each  chapter. 


II.   General  Treatises  in  Foreign  Languages. 
The  leading  foreign  works  are  : 

WAGNER,  ADOLF.  Grundlegung  der  Politischen  Oekonomie. 
(3  vols.,  Leipsic;  3d.  ed.,  1892-1894.)  —  By  the  chief  advocate 
of  "  Professorial  Socialism."  Erudite,  with  remarkable  bibli- 
ographies. A  French  translation  appeared  in  1905. 

ROSCHER,  WILHELM.  Grundlagen  der  Nationalokonomie.  Ein 
Hand-  und  Lesebuch.  (5  vols.,  Stuttgart,  1854-1894;  with  new 
editions  of  the  earlier  volumes  almost  every  year  until  his  death 
in  1894.)  —  By  one  of  the  founders  of  the  Historical  School. 
Contains  an  imposing  array  of  historical  notes.  The  first 
volume  has  appeared  in  English  dress  in  2  volumes. 

COHN,  GUSTAV.  Grundlegung  der  Nationalokonojnie.  Ein  Lehr- 
buch  filr  Studirende.  (3  vols.,  Stuttgart,  1885-1898.)  —  By  the 
best  stylist  among  the  German  economists.  Conservative  and 
interesting.  The  second  volume  has  been  translated  into  Eng- 
lish under  the  title  The  Science  of  Finance. 

SCHMOLLER,  GUSTAV.  Grundriss  der  allgemeinen  Volkswirth- 
schaftslehre.  (2  vols.,  Leipsic,  1900-1904.)  —  A  remarkable 


Foreign  Treatises.  xxi 

work  by  the  present  leader  of  the  Historical  School.  Brilliant 
and  fascinating,  but  weak  in  the  theoretical  parts.  A  French 
translation  was  published  in  1905. 

PHILIPPOVICH,  EUGEN  VON.  Grundriss  der  Politischen  Oekono- 
mie.  (2  vols.,  Tubingen,  1894-1899;  5th  ed.,  1904). — Sane, 
impartial  and  concise.  In  many  respects  the  best  German  worki 

LEROY-BEAULIEU,  PAUL.  Traite  Theorique  et  Pratique  d' Econo- 
mie  Politique.  (4  vols.,  Paris,  2d  ed.,  1896.)  —  A  pellucid 
work  by  the  chief  of  the  Orthodox  School  in  France. 

CAUWES,  PAUL.  Cours  d"1  Economic  Politique  contenant  avec 
V Expose  des  Principes  V Analyse  des  Questions  de  Legislation 
Economique.  (2  vols.,  Paris,  3d  ed.,  1893).  —  From  the  stand- 
point of  the  Comparative  and  Legal  School. 

PARETO,  VILFREDO.  Cours  d^Economie  Politique  professe  d 
FUniversitede  Lausanne.  (2  vols.,  Lausanne,  1896-1897.)  —  An 
acute  work,  by  an  Italian,  attempting  to  combine  the  mathemat- 
ical point  of  view  with  historical  details. 

III.  Periodicals. 

Classified  by  countries  the  chief  periodicals  are  as  follows  : 

UNITED  STATES. 

American  Economic  Association  Piiblications.  This  Association 
includes  the  leading  American  economists  and  a  large  number 
of  prominent  laymen.  Formed  in  1886,  its  Presidents  have 
been  in  order:  Francis  A.  Walker,  Charles  F.  Dunbar,  John 
B.  Clark,  Henry  C.  Adams,  Arthur  T.  Hadley,  Richard  T. 
Ely,  Edwin  R.  A.  Seligman  and  Frank  W.  Taussig.  The 
publications  include  the  Reports  of  the  Proceedings  of  the  An- 
nual Meetings  and  a  series  of  independent  monographs  on 
every  phase  of  economics.  Up  to  1897  these  were  published  at 
bi-monthly  intervals,  and  were  collected  in  eleven  volumes.  In 
1897  a  series  of  shorter  Studies  was  inaugurated,  and  larger  vol- 
umes were  occasionally  published  under  the  name  of  New 
Series.  In  1901  the  Studies  were  discontinued,  and  a  Third 
Series  of  more  elaborate  monographs  was  commenced,  published 
at  quarterly  intervals  and  still  in  progress.  The  agents  for  the 
publications  have  for  several  years  been  the  Macmillan  Co., 
New  York. 


xxii  Suggestions. 

The  Quarterly  Journal  of  Economics.  Published  for  Harvard 
University.  (Boston,  1886-.) 

Political  Science  Quarterly.  Edited  by  the  Faculty  of  Political 
Science  of  Columbia  University.  (New  York,  1886-.) 

The  Annals  of  the  American  Academy  of  Political  and  Social 
Science.  (Bi-monthly,  Philadelphia,  1890-.) 

The  Yale  Review.  A  Quarterly  Journal  for  the  Scientific  Discus- 
sion of  Economic,  Political  and  Social  Questions.  (New  Haven, 
1892-.) 

The  Journal  of  Political  Economy.  Published  for  the  University 
of  Chicago.  (Quarterly,  Chicago,  1892-.) 

The  American  Journal  of  Sociology.  (Bi-monthly,  Chicago, 
1896-.) 

The  International  Socialist  Review.     (Monthly,  Chicago,  1901-.) 

American  Historical  Association  Papers.  (New  York,  1886- 
1891.)  A  nnual  Report.  (Washington,  1892-.) 

Quarterly  Publications  of  the  American  Statistical  Association. 
(Boston,  1888-.) 

Journal  of  Social  Science.  (Boston,  1869-.)  Containing  the 
Transactions  of  the  American  Social  Science  Association. 

Sound  Currency.  (7  vols.,  New  York,  1895-1902.)  Edited  by 
the  Reform  Club  Sound  Currency  Committee. 

Municipal  Affairs.  (6  vols.,  New  York,  1897-1903.)  Edited  by 
the  Reform  Club  Committee  on  City  Affairs. 

Johns,  Hopkins  University  Studies  in  Historical  and  Political 
Science.  (Baltimore,  1883-.  One  volume  a  year,  composed 
of  twelve  numbers.  23  vols.  and  several  extra  volumes  to  1905.) 

Columbia  University  Studies  in  History,  Economics  and  Public 
Law.  Edited  by  the  Faculty  of  Political  Science.  (New  York, 
1891-.  Several  volumes  a  year,  each  consisting  of  from  one 
to  four  monographs.  24  vols.  to  1905.) 

Michigan  Political  Science  Association  Publications.  (Ann  Arbor. 
6  vols.  to  1905.) 

University  of  Wisconsin  Bulletin.  Economics  and  Political  Sci- 
ence Series.  (Vol.  I,  1904.) 


American  Periodicals.  xxiii 

Economic  articles  of  more  or  less  permanent  interest  are 
also  found  in  the  monthlies  like  the  North  American  Re- 
view, Forum,  American  Monthly  Review  of  Reviews,  Atlantic 
Monthly,  and  in  the  weeklies  like  the  Nation,  Outlook,  In- 
dependent, Charities  Review.  The  special  periodicals  and 
publications  devoted  to  particular  economic  interests  are  too 
numerous  to  mention.  Some  of  them  will  be  found  below 
under  Section  VI,  Semi-Official  Publications. 

GREAT  BRITAIN. 

The  Economic  Journal.  (Quarterly,  London,  1890-.)  The  Jour- 
nal of  the  British  Economic  Association,  since  1903  called  The 
Royal  Economic  Society. 

The  Economic  Review.  (Oxford,  1891-.)  Published  quarterly 
for  the  Oxford  University  Branch  of  the  Christian  Social  Union. 

Journal  of  the  Royal  Statistical  Society.  (Quarterly,  London, 
1837-) 

The  monthlies  like  the  Contemporary  Review,  Fortnightly 
Review,  National  Review,  Nineteenth  Century,  Independent 
Review ;  and  the  British  Quarterly  and  Edinburgh  Reviews 
generally  contain  some  articles  of  economic  interest.  The  most 
important  weekly  devoted  entirely  to  current  economic  topics 
is  The  Economist. 

GERMANY. 

Jahrbiicher  fiir  Nationalbkonomie  und  Statistik.  (Monthly,  Jena, 
1863.)  Edited  by  Conrad. 

Jahrbuch  fiir  Gesetzgebung,  Verwaltung  und  Volkswirthschaft. 
(Quarterly,  Leipsic,  1877.)  Edited  by  Schmoller. 

Zeitschrift  fiir  die  gesammte  Staatswissenschaft.  (Quarterly, 
Tubingen,  1844.)  Edited  by  Bucher. 

Archiv  fiir  Sociale  Gesetzgebung  und  Statistik.  (Quarterly, 
Berlin,  1888-.)  Edited  by  Braun. 

Archiv  fur  Sozialwissenschaft  und  Sozialpolitik .  (Quarterly, 
Tubingen,  1904-.)  Edited  by  Sombart  and  Weber. 

Zeitschrift  fiir  Sozialwissenschaft.  (Quarterly,  Berlin,  1898-0 
Edited  by  Wolf. 


xxiv  Suggestions. 

Vierteljahrschriftfilr  Sozial-  und  Wirthschaftsgeschichte.  (Quar- 
terly, 1904-.)  Edited  by  Bauer,  Below,  and  Hartmann. 

Zeitschrift  fur  die  gesammte  Versicherungswissenschaft.     ( 1 900-.) 
Finanz- Archiv.    (Quarterly,  Stuttgart,  1884-.)   Edited  by  Schanz. 

Archiv  fur  Eisenbahniuesen.  (Monthly,  Berlin,  1875-.)  Edited 
by  Von  der  Ley  en. 

Zeitschrift  fur  Kolonialpolitik,  Kolonialrecht  und  Kolonialiuirth- 
schaft.  (1899-.) 

Thunen  Archiv.     (Jena,  1905-.)     Edited  by  Ehrenberg. 

Die  neue  Zeit.     (Monthly,  Stuttgart,  1883-.)     Edited  by  Kautsky. 

Documente  des  Sozialismus.  (Monthly,  Stuttgart,  1901-.)  Edited 
by  Bernstein. 

Marx  Studien .     ( 1 905-. ) 

Publications  of  the  Vereinfiir  Sozialpolitik.  (Several  volumes  a 
year,  Leipsic,  1873-.) 

Staats-  undsozialwissenschaftliche  Forschungen.  (Leipsic,  1878-.) 
Edited  by  Schmoller. 

Sammlung  nationalokonomischer  und  statistischer  Abhandlungen 
des  staatswissenschaftlichen  Seminars  zu  Halle.  (Jena,  1877-.) 
Edited  by  Conrad. 

Munchener  volkswirthschaftliche  Studien.  (Stuttgart,  1893-.) 
Edited  by  Brentano  and  Lotz. 

FRANCE. 

Journal  des  £conomistes.  (Monthly,  Paris,  1843-.)  Edited  by 
Molinari. 

Revue  d>  Economic  Politique.  (Monthly,  Paris,  1887-.)  Edited 
by  Cauwes,  Gide,  and  Martin. 

Reforme  Sociale.  (Paris,  1880-.)  Bulletin  of  the  Societe 
d'£conomie  Sociale. 

Bulletin  de  Statistique  et  de  Legislation  comparee.  (Monthly, 
Paris,  1877-.) 

Revue  Internationale  de  S&iologie.  (Monthly,  Paris,  1893-.) 
Edited  by  Worms. 


Foreign  Periodicals.  xxv 

Musee  Social.     Annales.     (Monthly,  Paris,  1896-.) 
U  Economists  Franqais.     (Weekly,  Paris.) 

ITALY. 

Giornale  degli  Economisti.  (Monthly,  Padova,  1875-1878  and 
again  Bologna  and  Rome,  1886-.)  Edited  by  Montemartini. 

Bulletin  de  rinstitut  International  de  Statistique.  (Yearly, 
Rome,  1886-.)  Edited  by  Bodio. 

BELGIUM. 
Revue     Economique     Internationale.       (Bi-Monthly,      Brussels, 

1904-0 

AUSTRIA. 

Zeitschrift  fur  Volkswirthschaft,  Socialpolitik  und  Verivaltung. 
(Quarterly,  Vienna,  1892-.)  Edited  by  Bbhm-Bawerk,  Philip- 
povich,  and  others. 

IV.    Dictionaries  and  Cyclopedias  of  Economics. 

PALGRAVE,  R.  H.  INGLIS,  ed.  Dictionary  of  Political  Economy. 
(3  vols.,  London,  1894-1899.)  —  An  admirable  work,  but  not 
devoting  special  attention  to  American  conditions. 

BLISS,  WILLIAM  D.  P.,  ed.  The  Encyclopedia  of  Social  Reform 
including  Political  'Economy,  Political  Science,  Sociology  and 
Statistics.  (New  York,  1897.)  —  Not  profound  nor  always 
trustworthy. 

LALOR,  JOHN  J.,  ed.  Cyclopedia  of  Political  Science,  Political 
Economy  and  United  States  History.  (Chicago,  3  vols.,  1882.) 
—  Inadequate  for  economics  and  now  somewhat  out  of  date. 

CONRAD,  ELSTER,  LEXIS  and  LOENING,  eds.  Handworterbuch 
der  Staatswissenschaften.  (6  vols.,  Jena,  1890-1894,  2d  ed., 
1898-1901.) — The  most  complete  and  elaborate  cyclopaedia  of 
economics  in  existence. 

ELSTER,  LUDWIG,  ed.  Wbrterbuch  der  Volkswirthschaft  (2 
vols.,  Jena,  1898.)  —  Of  more  importance  to  continental  students. 

SCHONBERG,  GUSTAV.  Handbuch  der  Politischen  Oekonomie.  (3 
vols.,  Tubingen,  1882  ;  4th  ed.,  1896-1898.)  —  Comprises  a  series 
of  thorough  and  valuable  monographs  by  the  leading  German 
specialists. 


xxvi  Suggestions. 

SAY,  LEON,  and  CHAILLEY,  JOSEPH,  eds.  Nouveau  Dictionnairc 
d^conomie  Politique.  (2  vols.,  Paris,  1891-1892.) — Inferior 
to  both  Palgrave  and  Conrad. 


V.    Government  Documents. 

A.     LOCAL  AND  STATE  PUBLICATIONS. 

A  large  amount  of  material  on  economic  topics  is  published 
by  the  various  American  governments,  —  local,  state  and  na- 
tional. The  municipal  governments  of  the  chief  American 
cities  publish  annually  reports  of  their  various  city  depart- 
ments. Among  them,  of  economic  interest,  are  the  reports 
dealing  with  city  finances,  water,  gas  and  electricity,  charities, 
housing,  transportation  and  the  like.  Few  of  the  reports 
reach  the  high  level  exemplified  by  the  New  York  Report  of 
the  Tenement  House  Department  for  1904,  or  the  Cleveland 
Report  of  the  Water  Works  Division  of  the  Board  of  Public 
Service  for  1903.  The  state  governments  publish  the  reports 
of  labor  bureaus.  Of  these,  the  best  are  those  of  New  York 
and  Massachusetts,  but  New  Jersey,  Pennsylvania,  Illinois  and. 
a  few  others  issue  fairly  good  reports.  The  annual  reports  of 
the  New  York  Department  of  Labor  appear  in  three  volumes, 
containing  (i)  the  General  Report  of  the* Commissioner  and  the 
Report  of  the  Bureau  of  Mediation  and  Arbitration,  (2)  the 
Report  of  the  Bureau  of  Labor  Statistics,  and  (3)  the  Report  of 
the  Bureau  of  Factory  Inspection.  Occasionally  special  re- 
ports are  published,  as  on  Labor  Legislation,  Employers'  Lia- 
bility, Welfare  Institutions,  etc. 

The  reports  of  the  Massachusetts  Bureau  of  Statistics  of 
Labor  comprise  the  Annual  Report  on  the  Statistics  of  Labor, 
the  Annual  Report  on  the  Statistics  of  Manufactures  and  vari- 
ous Special  Reports. 

Both  New  York  and  Massachusetts  also  publish  periodical 
bulletins,  the  Labor  Bulletin  of  Massachusetts  appearing  every 
two  months,  the  Department  of  Labor  Bulletin  of  New  York 
appearing  quarterly.  The  reports  of  the  other  states  are  not 
so  valuable  or  voluminous,  but  often  contain  matter  of  im- 


Local  Documents.  xxvii 

portance.  An  Analysis  and  Index  of  all  Reports  issued  by 
State  Bureaus  of  Labor  Statistics  was  published  by  the  Na- 
tional Department  of  Labor  in  1893,  and  has  since  then  been 
brought  down  to  date  from  time  to  time.  The  separate  states 
publish  in  turn  the  annual  proceedings  of  the  National  Conven- 
tion of  Chiefs  and  Commissioners  of  the  various  Bureaus  of 
Statistics  of  Labor  in  the  United  States,  as  well  as  of  the  Inter- 
national Association  of  Factory  Inspectors  of  North  America. 

The  state  governments  also  publish  regularly  the  State 
Treasurers'  and  Comptrollers'  Reports,  Reports  of  Railroad 
Commissions,  Reports  of  Bank  and  Insurance  Examiners,  Re- 
ports on  Taxation,  Reports  of  Inspectors  of  Food  and  Animals, 
Reports  of  Boards  of  Charities  and  Correction,  Reports  on 
Prison  Labor,  Reports  on  Mining  Statistics,  Reports  of  State 
Agricultural  Experiment  Statistics,  Health  Reports  and  the 
like.  A  few  also  publish  at  regular  intervals  a  State  Census: 
the  best  is  that  of  Massachusetts. 

Some  of  the  states  publish  occasional  reports  of  legislative 
or  special  committees.  Of  these  the  most  common  are  the 
Reports  on  Taxation.  A  complete  list  of  these  will  be  found 
in  the  chapter  on  "  Recent  State  Reports  on  Taxation "  in 
Essays  in  Taxation  by  the  author  of  this  volume.  Deserving 
of  mention  on  other  topics  are  the  Massachusetts  Report  on  the 
Subject  of  the  Unemployed  (1895)  ;  Report  of  Special  Committee 
to  investigate  the  Relations  between  Cities  and  Towns  and  Street 
Railway  Companies  (1901)  ;  Report  of  the  Committee  on  Cor- 
poration Laws  (1903)  ;  and  the  New  York  Report  of  the  Tene- 
ment House  Committee  of  1894,  the  Tenement  House  Committee 
of  1901  ;  the  Joint  Committee  on  Trusts,  1897  ;  and  the  Com- 
mittee on  Canals  (2  vols.,  1899). 

Practically  the  only  general  guides  to  the  legislation  discussed 
in  these  reports  are  the  exceedingly  valuable  Annual  Compara- 
tive Summary  and  Index  of  State  Legislation  and  the  Annual 
Review  of  Legislation,  both  published  by  the  New  York  State 
Library  under  the  editorship  of  R.  H.  Whitten.  These  cover 
the  entire  country  and  contain  an  accurate  and  well-digested 
survey  of  the  whole  field  of  state  legislation. 


xxviii  Suggestions. 

B.    NATIONAL  DEPARTMENTAL  PUBLICATIONS. 

The  publications  of  the  national  government  are  of  three 
kinds:  regular  departmental  issues,  special  departmental  re- 
ports and  reports  of  congressional  committees. 

THE  DEPARTMENT  OF  COMMERCE  AND  LABOR,  organized  in 
1903,  now  publishes  by  far  the  largest  mass  of  material  of  inter- 
est to  students  of  economics.  In  addition  to  numerous  new 
duties,  it  has  taken  over  much  work  previously  devolving  upon 
other  departments.  For  details  see  the  Organization  and  Law 
of  the  Department  of  Commerce  and  Labor  (1904,  716  pages, 
with  full  histories).  The  chief  bureaus,  so  transferred,  which 
publish  economic  material,  are  the  Census  Office  from  the  De- 
partment of  the  Interior,  the  Bureau  of  Immigration  and  the 
Bureau  of  Statistics  from  the  Treasury  Department,  the  Bureau 
of  Foreign  Commerce  (now  consolidated  with  the  Bureau  of 
Statistics)  from  the  State  Department,  the  Bureau  of  Fisheries 
formerly  known  as  the  Fish  Commission,  and  the  Bureau  of 
Labor,  formerly  known  as  the  Department  of  Labor. 

The  Department  publishes  annually  the  Report  of  the  Secre- 
tary. The  other  publications  are  issued  by  the  separate 
bureaus  or  divisions  as  follows: 

i.  THE  CENSUS.  Until  1900  this  was  published  every  ten 
years.  The  three  most  recent  issues  are  The  Tenth  Census 
(1880,  in  24  vols.),  The  Eleventh  Census  (1890,  in  28  vols.), 
and  The  Twelfth  Census  (1900,  in  16  vols.).  The  permanent 
Census  Bureau,  organized  in  1902,  publishes  every  year  the  Re- 
port of  the  Director  and  a  number  of  Bulletins.  The  most 
important  of  those  that  have  appeared  from  1902  to  1905  are 
Discussions  of  Population  (Nos.  i,  4,  7,  13,  14  and  15),  Cotton 
Crops  (Nos.  2,  10  and  19),  Irrigation  (No.  16),  Telephones 
and  Telegraphs  (No.  17).  The  Bureau  has  also  begun  the 
publication  of  a  series  of  comprehensive  reports,  of  which  two 
have  appeared  in  1905,  Mines  and  Quarries,  1902,  and  Street 
and  Electric  Railways,  1902.  It  has  also  published  the  Philip- 
pine Census  (4  vols.,  1905).  Several  other  elaborate  investi- 
gations as  well  as  the  Manufacturing  Census  of  1905  are  in 
progress. 


Departmental  Publications.          xxix 

2.  THE  BUREAU  OF  STATISTICS  divides  its  publications  into 
two  groups. 

Group  I.  is  called  Foreign  Commerce  of  the  United  States .  It 
comprises  (a)  the  annual  quarto  Report  on  the  Foreign  Commerce 
and  Navigation  of  the  United  States  in  two  bulky  volumes,  also 
including  much  detailed  information  on  internal  commerce  and 
general  economic  conditions ;  (V)  the  annual  octavo  Statistical 
Abstract  of  the  United  States,  a  valuable  condensed  compila- 
tion ;  (c)  a  monthly  quarto  Summary  of  Commerce  and  Finance 
of  the  United  States,  often  containing  monographs  on  special 
topics  ;  among  which  may  be  mentioned  (1903-1905)  those  on 
Colonial  Administration,  Modern  Tariff1  Systems,  Wholesale 
Prices  in  Great  Britain  and  the  United  States,  Reciprocity 
Treaties,  Great  Canals  of  the  World,  and  Statistical  Abstract 
of  the  World  ;  (d)  a  monthly  Summary  of  Internal  Commerce  ; 
and  (<?)  occasional  reports  on  special  topics  of  domestic  impor- 
tance, like  the  Report  on  Lake  Commerce  (by  Tunnell,  1895), 
various  Reports  on  Wool  and  Manufactures  of  Wool  (1887, 
1888,  1894);  the  Report  on  the  Warehousing  Industry  in  the 
United  States  (1904). 

Group  II  is  called  Consular  Reports.  Up  to  July,  1903, 
these  were  issued  by  the  Bureau  of  Foreign  Commerce  of  the 
State  Department.  They  now  comprise  (a)  Commercial  Rela- 
tions, or  the  annual  reports  of  consular  officers  on  economic 
topics ;  (b)  Review  of  World' 's  Commerce,  a  summary  of  the 
above ;  (c]  the  monthly  Consular  Reports,  being  miscellaneous 
reports  from  diplomatic  and  consular  officers ;  (</)  a  daily  Bul- 
letin, designed  especially  for  the  newspapers  but  also  widely  used 
by  business  men,  known  as  Daily  Consular  and  Trade  Reports, 
containing  reports  from  the  consular  officers  as  well  as  informa- 
tion from  special  agents  and  private  investigators  j  (<?)  a  semi- 
weekly  Statement  of  Commercial  Information  ;  and  (/)  Special 
Consular  Reports,  made  in  pursuance  to  special  instructions. 
Among  the  35  volumes  of  such  special  reports  issued  in  1890- 
1905  the  most  important  are  those  on  Mortgages;  Gas; 
Coal;  Textiles;  Sheep  and  Wool;  India  Rubber;  Tariffs ; 
Trusts  and  Trade  Combinations ;  Streets  and  Highways ; 


xxx  Suggestions. 

Steamship  Subsidies ;  fruit  Culture ;  Trade  Guilds ;  Com- 
mercial Travellers  :  Merchant  Marines ;  Money  and  Prices  ; 
Industrial  Education  ;  Windmills  and  Storage  Warehouses ; 
all  of  them  treating  of  conditions  abroad. 

3.  THE  BUREAU  OF  LABOR  publishes  since  1866  an  annual 
report  and  since  1889  special  reports.  The  nineteen  annual 
reports  are  as  follows  : 

First  Annual  Report :  Industrial  Depressions.     (1886.) 
Second  A nnual  Report :  Convict  Labor.     ( 1 887.) 
Third  A  nnual  Report :  Strikes  and  Lockouts,     (i  888 .) 
Fourth  Annual  Report:   Workingmen  in  Large  Cities.    (1889.) 
Fifth  Annual  Report ':  Railroad  Labor.    (1890.) 

Sixth  Annual  Report :  Cost  of  Production,  Iron,  Steel,  Coal,  etc. 

(1891.) 
Seventh  Annual  Report:   Cost  of  Production,  the   Textiles  and 

Glass.     (2  vols.,  1892.) 

Eighth  Annual  Report :  Industrial  Education.     (1893.) 

Ninth  Annual  Report :  Building  and  Loan  Associations.    (1894.) 

Tenth  Annual  Report :  Strikes  and  Lockouts.     (2  vols.,  1894.) 

Eleventh  Annual  Report:  Work  and  Wages  of  Men,  Women 
and  Children .  ( 1 897 . ) 

Twelfth  Annual  Report :  Economic  Aspects  of  the  Liquor  Prob- 
lem. (1898.) 

Thirteenth  Annual  Report :  Hand  and  Machine  Labor.  (2  vols., 
1899.) 

Fourteenth  Annual  Report:  Water,  Gas  and  Electric  Light 
Plants  under  Private  and  Municipal  Ownership.  (1900.) 

Fifteenth  Annual  Report :   Wages  in  Commercial  Countries.     (2 

vols.,  1900.) 
Sixteenth  Annual  Report :  Strikes  and  Lockouts  (1881  to  1900). 

(1901.) 
Seventeenth  Annual  Report:  Trade  and   Technical  Education. 

(1902.) 
Eighteenth  Annual  Report :  Cost  of  Living  and  Retail  Prices  of 

Food.     1903.     (1904.) 

Nineteenth  Annual  Report :  Wages  and  Hours  of  Labor.    (1905). 


Departmental  Publications.          xxxi 

The  eleven  special  reports  are  as  follows : 

First  Special  Report :  Marriage  and  Divorce  in  the  United  States. 

(1889.) 
Second  Special  Report:  Labor  Laws  of  some  States.     (1892;  2d 

ed.,  1896.) 
Third  Special  Report ;  Analysis  and  Index  of  all  Reports  issued 

by  Bureaus  of  Labor  Statistics  in  the  United  States.     (1893.) 
Fourth    Special   Report;    Compulsory  Insurance   in    Germany. 

(1893.) 
Fifth  Special  Report :   The  Gothenburg  System  of  Liquor  Traffic. 

(1893.) 
Sixth   Special  Report ;    The  Phosphate  Industry  of  the  United 

States.     (1893.) 
Seventh  Special  Report :    The  Slums  of  Baltimore,  Chicago,  New 

York  and  Philadelphia.     ( 1 894. ) 
Eighth  Special  Report :    The  Housing  of  the   Working  People. 

(1895.) 

Ninth  Special  Report :   The  Italians  in  Chicago.     (1897.) 
Tenth  Special  Report :  Labor  Laws  of  the  United  States.    (1904.) 
Eleventh  Special  Report :  Restriction  of  Output.     (1905.) 

The  Bureau  also  publishes  a  bi-monthly  Bulletin  of  the 
Bureau  of  Labor,  with  valuable  original  articles,  a  survey  of 
foreign  statistical  labor  publications,  the  decisions  of  the  courts 
affecting  labor,  and  all  new  labor  laws  of  the  separate  states. 

4.  THE  BUREAU  OF  MANUFACTURES,  now  (1905)  being  or- 
ganized, publishes  annually  the  Report  of  the  Director.     The 
reports  are  also  expected  to  contain  information  derived  from 
abroad  through  the  consular  officers.    This  information  is  trans- 
mitted to  the  Department  of  Commerce  and  Labor  from  the 
Department  of  State  through  the  newly  organized  Bureau  of 
Trade  Relations. 

5.  THE  BUREAU  OF  CORPORATIONS  publishes  since  1904  the 
annual  Report  of  the  Commissioner  of  Corporations.    It  has  also 
published  (1905)  a  special  Report  on  the  Beef  Industry,  and 
has  in  preparation  a  volume  on  "Anti-Trust"  Legislation  as 
well  as  a  number  of  other  important  reports. 


xxxii  Suggestions. 

6.  THE  BUREAU  OF  IMMIGRATION  publishes  since  1892  the 
annual   Report  of  the  Commissioner- General  of  Immigration 
with  a  wealth  of  detail  and  elaborate  colored  maps. 

7.  THE  BUREAU  OF  FISHERIES  publishes  since  1871  Bulletins 
and  Reports  on  the  Fisheries. 

THE  TREASURY  DEPARTMENT  issues  the  Annual  Report  of 
the  Secretary  of  the  Treasury,  which  contains  a  survey  of  the 
Finances,  and  includes  the  Reports  of  the  Treasurer,,  the  Register 
of  the  Treasury,  the  Director  of  the  Mint,  the  Comptroller  of 
the  Currency,  and  the  Commissioner  of  the  Internal  Revenue. 
These  reports  are  also  published  separately,  the  last  three  in 
enlarged  form  and  with  voluminous  tables. 

THE  DIRECTOR  OF  THE  MINT  publishes  annually  a  separate 
Report  upon  the  Production  of  the  Precious  Metals  in  the 
United  States,  a  substantial  part  of  which  deals  with  the  output 
of  gold  and  silver  in  foreign  countries.  These  statistics  are  of 
international  reputation. 

THE  DEPARTMENT  OF  AGRICULTURE  publishes  the  annual 
Report  of  the  Secretary,  the  Yearbook  of  the  Department,  with 
many  original  articles  and  a  great  variety  of  documents  separately 
issued  by  the  various  bureaus.  Of  these  the  most  important  are 
the  BUREAU  OF  ANIMAL  INDUSTRY;  the  BUREAU  OF  PLANT 
INDUSTRY,  with  separate  divisions  publishing  Vegetable  Pathol- 
ogy and  Physiology  Bulletins,  Botany  Bulletins,  Agrostology 
Bulletins,  and  Pomology  Bulletins ;  the  FOREST  SERVICE  ;  the 
BUREAU  OF  CHEMISTRY;  the  BUREAU  OF  SOILS;  the  BUREAU 
OF  ENTOMOLOGY  ;  the  BIOLOGICAL  SURVEY  ;  the  BUREAU  OF 
STATISTICS  ;  the  OFFICE  OF  EXPERIMENT  STATIONS,  which  pub- 
lishes the  Experimental  Station  Record  as  well  as  a  separate 
Annual  Report,  and  also  issues  the  Agricultural  College 
Bulletins;  and  the  OFFICE  OF  PUBLIC  ROADS  INQUIRIES. 
Numerous  reports  are  issued  by  the  BUREAU  OF  STATISTICS  in 
its  three  sections :  (a)  the  DIVISION  OF  DOMESTIC  CROP  RE- 
PORTS (which  publishes  the  monthly  Crop  Reporter),  (b)  the 
DIVISION  OF  FOREIGN  MARKETS  and  (c)  the  MISCELLANEOUS 
DIVISION,  which  publishes  statistics  on  rural  economics.  The 
Department  also  publishes  the  Proceedings  of  the  Annual 


Departmental  Publications.        xxxiii 

Meeting  of  the  American  Association  of  Farmers'  Institute 
Workers,  and  many  voluminous  Special  Reports,  some  of  the 
most  important  of  recent  years  being  The  Cotton  Plant,  Useful 
Fiber  Plants  of  the  World ;  Beet  Sugar ;  and  Co-operative 
Credit  Associations  Abroad.  In  1904  there  were  issued  972 
publications  in  over  twelve  million  copies,  about  half  of  them 
being  Farmers'  Bulletins.  The  DIVISION  OF  PUBLICATIONS 
publishes  a  Monthly  List  of  Publications,  which  forms  a  con- 
venient bibliography  of  the  Department  issues. 

THE  DEPARTMENT  OF  THE  INTERIOR  publishes  annually  the 
Report  of  the  Secretary,  containing  among  others  the  reports  of 
the  GENERAL  LAND  OFFICE,  INDIAN  AFFAIRS,  PENSIONS,  PATENT 
OFFICE,  the  GEOLOGICAL  SURVEY,  the  TERRITORIES,  the  NA- 
TIONAL PARKS  and  the  ELEEMOSYNARY  INSTITUTIONS.  The 
Decisions  in  Land  Cases  usually  appear  in  two  volumes  a  year, 
and  the  Decisions  in  Patent  Cases  in  one  volume  every  two 
years.  The  GEOLOGICAL  SURVEY  publishes  its  annual  Reports 
separately  in  several  volumes,  and  a  large  number  of  Bulletins, 
Monographs  and  Professional  Papers.  It  also  publishes  since 
1882  the  Mineral  Resources  of  the  United  States,  and  since 
1888  the  Irrigation  Survey  of  the  United  States.  The  Com- 
missioner of  Patents  publishes  the  Patent  Office  Gazette  ;  Indexes 
to  Patents  ;  etc. 

THE  INTERSTATE  COMMERCE  COMMISSION  (not  subordinate  to 
any  of  the  nine  executive  departments)  publishes  since  1887  the 
annual  Report  of  the  Commission.  A  separate  volume  prepared 
by  the  Statistician  to  the  Commission  is  the  annual  Report  of 
the  Statistics  of  Railways  in  the  United  States.  The  cases 
themselves  are  published  as  Decisions  of  the  Interstate  Commerce 
Commission  of  the  United  States,  reported  by  the  Commission. 
The  Commission  also  issues  annually  the  Proceedings  of  the  An- 
nual Convention  of  State  Railway  Commissioners.  The  Com- 
mission published  in  1903  a  monumental  work  in  five  quarto 
volumes,  entitled  Railways  in  the  United  States  in  1902 ;  a 
Twenty-two-  Year  Review  of  Railway  Operations  ;  a  Forty-  Yea? 
Review  of  Changes  in  Freight  Tariffs  ;  a  Fifteen-  Year  Review 
of  Federal  Railway  Regulation  ;  a  Twelve-  Year  Review  of  State 


xxxiv  Suggestions. 

Railway  Regulation  ;  and  a  Twelve  Year  Review  of  State  Rail- 
way Taxation. 

THE  POST-OFFICE  DEPARTMENT  publishes  the  annual  Report 
of  the  Postmaster-General.  This  is  the  bulkiest  of  the  depart- 
mental reports. 

THE  WAR  DEPARTMENT  deals  with  economic  topics  through 
the  recently  erected  BUREAU  OF  INSULAR  AFFAIRS,  dealing 
especially  with  the  Philippines  and  Porto  Rico.  The  chief  of 
the  Insular  Bureau  issues  his  Annual  Report  and  a  great  variety 
of  other  documents. 

THE  NAVY  DEPARTMENT  deals  in  the  annual  Report  of  the 
Secretary  with  the  subject  of  the  Commercial  Marine. 

THE  SMITHSONIAN  INSTITUTE  publishes  many  annual  reports, 
of  which  the  one  of  chief  interest  to  economists  is  the  Report  of 
the  Bureau  of  Ethnology  in  one  or  more  sumptuous  quarto 
volumes. 

THE  INTERNATIONAL  BUREAU  OF  THE  AMERICAN  REPUBLICS 
publishes  since  1891  an  annual  Report  of  the  Director,  since 
1893  a  monthly  Bulletin  of  the  Bureau  and  a  large  number  of 
Reports,  Handbooks,  Bibliographical  Bulletins,  Maps,  Law 
Manuals,  and  Special  Commercial  Bulletins,  many  of  them  also 
in  Spanish  and  Portuguese. 

For  a  clear  account  of  the  various  branches  of  the  Adminis- 
tration, see  FAIRLIE,  J.  A.  The  National  Administration  of  the 
United  States  of  America.  ( 1 905 . ) 

C.   CONGRESSIONAL  DOCUMENTS. 

Among  the  numberless  Congressional  Documents  of  recent 
years  may  be  mentioned  as  of  special  interest  to  the  students  of 
economics  : 

Reports  of  the  International  Monetary  Conference  of  1878,  1881, 
and  1892  ;  of  the  India  Currency  Commission,  1892 ;  of  the  Ber- 
lin Silver  Commission,  1894- 

Senate  (Aldrich)  Committee,  Report  on  Wholesale  Prices,  Wages 
and  Transportation.  (4  vols.,  1893.) 

United  States  Strike  Commission,  Report  on  the  Chicago  Strike 
0/1894. 


Congressional  Documents.  xxxv 

(Senate)  Committee  on  Education  and  Labor,  Report  on  the  Eight 
Hour  Law.  (1898.) 

Anthracite  Coal  Strike  Commission,  Report  on  the  Anthracite 
Coal  Strike  of  1902.  (1903.) 

(Senate)  Committee,  Report  on  Labor  Disturbances  in  Colorado, 
1880-1904.  (1904.) 

Tariff  Commission,  Report.     (1882.) 

(House)  Committee  on  Ways  and  Means,  Tariff"  Hearings. 
(2  vols.,  1892.) 

Joint  Select  Committee  of  Congress,  Report  on  Alcohol  in  the 
Manufactures  and  Arts.  (1897.) 

(Senate)  Merchant  Marine  Commission,  Report.     (1905.) 
International  American  Conference,  Report.     (1890.) 
(Senate)  Reports  on  Interstate  Commerce.     (2  vols.,  1886.) 

Commission  to  Investigate  the  Postal  Service,  Report  on  Railway 
Mail  Pay.  (2  vols.,  1901.) 

(Senate)  Committee  on  Interstate  Commerce,  Hearings  on  Regu- 
lation of  Railway  Rates.  (5  vols.,  1905.) 

(Senate)  Committee,  Information  on  Postal  Telegraph  and  Tele- 
phone Lines,  Postal  Savings  Banks,  Government  Life  Annuities 
and  Provisions  for  Old  Age  in  Foreign  Countries.  (1898.) 

DONALDSON,  T.     Report  on  The  Public  Domain.     (1884.) 

Public  Lands  Commission,  Preliminary  and  Second  Reports. 
(1905.) 

Far  and  away  the  most  valuable  report  of  recent  years  is  that 
of  the  Industrial  Commission  appointed  by  the  Senate  and  the 
House,  and  published  under  the  simple  title  of  Report  of 
the  Industrial  Commission  (19  vols.,  1900-1902).  The  list  of 
volumes  is  as  follows  :  I.  Trusts  and  Industrial  Combinations  ; 
II.  Trust  and  Corporation  Laws ;  III.  Prison  Labor;  IV. 
Transportation ;  V.  Labor  Legislation ;  VI.  Distribution  of 
Farm  Products  ;  VII.  Capital  and  Labor  in  Manufactures  and 
in  General  Business;  VIII.  Chicago  Labor  Disputes;  IX. 
Transportation  ;  X.  Agriculture  and  Agricultural  Labor  ;  XI. 
Agriculture  and  Taxation',  XII.  Capital  and  Labor  in  the 


xxxvi  Suggestions. 

Mining  Industries  ;  XIII.  Trusts  and  Industrial  Combina- 
tions /  XIV.  Capital  and  Labor  in  Manufactures  and  General 
Business ;  XV.  Immigration  and  Education ;  XVI.  Foreign 
Labor  Legislation;  XVII.  Labor  Organization,  Labor  Dis- 
putes and  Arbitrations  ;  XVIII.  Industrial  Combinations  in 
Europe;  XIX.  Final  Report.  For  the  wealth  of  material, 
and  the  ability  with  which  the  results  are  presented,  this  huge 
report  is  unique  in  the  annals  of  the  government  publications. 
The  final  volume  gives  an  admirable  survey  of  the  present  eco- 
nomic condition  of  the  United  States. 

The  American  governments  are  exceedingly  liberal  in  the 
distribution  of  documents.  All  local  and  state  reports  can 
usually  be  had  for  the  asking ;  but  as  the  supply  is  limited,  it  is 
well  not  to  delay.  As  to  the  documents  of  the  national  gov- 
ernment, the  House  and  Senate  publications  can  be  obtained 
by  application  to  one's  Representative  or  Senator ;  the  depart- 
mental publications  by  application  to  the  respective  depart- 
ments. There  is  now  also  a  Superintendent  of  Documents,  who 
is  authorized  by  law  to  sell  surplus  documents  in  his  charge  at 
cost  of  printing  from  the  plates.  He  publishes  a  monthly  Price 
List  of  United  States  Public  Documents  for  Sale.  In  a  few  cases, 
however,  documents  are  sold  by  other  parties.  Thus  the  Con- 
gressional Record  is  sold  by  the  Chief  Clerk  of  the  Government 
Printing  Office ;  the  Bulletins,  Handbooks,  etc.,  of  American 
Republics  Bureau  are  sold  by  the  Director  of  the  Bureau  ;  the 
Official  Gazette  of  the  Philippine  Government,  by  the  Editor  in 
Manila ;  etc.,  etc.  Several  private  firms  in  Washington  and 
elsewhere  make  a  business  of  supplying  government  documents. 

D.   INDEXES  TO  GOVERNMENT  PERIODICALS. 

POORE,  BEN  PERLEY.  A  Descriptive  Catalog  of  the  United  States 
Government  Publications,  1774-1881.  (1885.)  —  Not  entirely 
satisfactory. 

Catalogue  of  the  Public  Documents  of  Congress  and  all  the  De- 
partments of  Government  from  1893-1896.  (4  vols.  to  1901.) 

Tables  of,  and  Annotated  Index  to,  the  Congressional  Series  of 
United  States  Pitblic  Documents,  15th  to  52d  Congress.  (1902.) 


British  Documents.  xxxvii 

LUNT,  E.  C.  Key  to  the  Publications  of  the  United  States  Census, 
1790-1887  ;  (in  American  Statistical  Association,  Publications, 
new  Series,  I,  1888.)— A  carefully  classified  guide. 

LANE,  L.  P.  Aids  in  the  Use  of  the  United  States  Government 
Publications  (in  American  Statistical  Association  Publications, 
VII,  1900). 

HART,  A.  B.  Actual  Government  (Am.  Citizen  Series,  1903; 
rev.  ed.  1904.)  —  Contains  at  p.  xxxiii  a  list  of  indexes  to  govern- 
ment publications. 

E.   BRITISH  OFFICIAL  PUBLICATIONS. 

In  Great  Britain  the  official  publications  and  reports,  known 
as  Blue  Books,  are  in  some  respects  more  voluminous  than  in 
the  United  States.  The  chief  periodical  report  is  the  decennial 
Census.  The  Census  of  i8gi  appeared  in  7  volumes.  The 
Census  of  1901  is  still  in  process  of  publication.  Most  of  the 
annual  reports  fall  under  the  heads  of  Finance,  Trade  and 
Labor. 

FINANCE.  Among  these,  each  in  a  separate  volume  or  volumes, 
are  the  Finance  Accounts;  Financial  Estimates ;  Returns  show- 
ing Revenue  and  Expenditure ;  National  Debt  Account;  National 
Debt  during  Sixty  Years  ;  Consolidated  Fund  Abstract  Accounts  ; 
Commissioners  of  Inland  Revenue;  Income  Tax  Assessments; 
Local  Taxation  Returns,  Mint  Report,  Rateable  Property  Return ; 
Savings  Bank  Returns,  Commissioners  of  H.  M?s  Customs. 

TRADE.  These  include  Reports  on  Trade  of  the  United  King- 
dom with  Foreign  Countries  and  British  Possessions  ;  Statistical 
Tables  showing  Progress  of  British  Trade  and  Production;  Mer- 
chant Shipping  Returns ;  Canals  and  Navigation  Returns;  Navi- 
gation and  Shipping  Statements ;  Railway  Accidents ;  Emigration 
and  Immigration.  Also  monthly  Trade  and  Navigation  Accounts 
and  a  Board  of  Trade  Journal. 

LABOR.  These  reports,  issued  by  the  Labor  Department  of  the 
Board  of  Trade,  include  Abstract  of  Labor  Statistics ;  Changes  in 
Wages  and  Hours  of  Labor,  Conciliation  (Trade  Disputes}  Act ; 
Strikes  and  Lockouts ;  Trade  Unions;  Directory  of  Industrial 
Associations ;  Report  of  Chief  Inspector  of  Factories  and  Work- 
shops ;  Chief  Registrar  of  Friendly  Societies,  Co-operative  Con- 
tracts, Industrial  and  Provident  Societies;  also  a  monthly  Board 
of  Trade  Labor  Gazette. 


xxxviii  Suggestions. 

Other  annual  reports  are  : 

Agricultural  Returns  {Board  of  Agriculture}  ;  Department  of 
Agriculture  and  Technical  Instruction  in  Ireland;  Registrars 
General  of  England,  Scotland  and  Ireland,  Irish  Land  Commis- 
sion, Reports  on  Mines  and  Quarries  (Home  Office)  ;  Inspector 
of  Sea  and  Salmon  Fisheries ;  Geological  Survey  ;  Returns  relat- 
ing to  Poor  Rates  and  Pauperism ;  Railway  and  Canal  Commis- 
sion: Street  and  Road  Tramways;  Postmaster-General.  There 
is  also  a  valuable  Statistical  Abstract  for  the  United  Kingdom. 

Among  the  recent  special  Reports  of  departments  and  Parlia- 
mentary committees  and  commissions  the  most  important  are  : 

Royal  Commission  on  Agriculture  (4  vols.,  1896),  and  Reports 
of  Assistant  Commissioners  (20  vols.,  1896)  ;  The  Sweating  Sys- 
tem (8  vols.,  1889);  Commission  on  Labor  (27  vols.,  1894);  Com- 
mission on  Local  Taxation  (9  vols.,  1902)  ;  India  Currency 
Committee  (1893  and  1899);  Financial  Relations  between  Great 
Britain  and  Ireland  (2  vols.,  1896)  ;  Standard  Piece  and  Time 
Rates  (1893  and  1900);  Wages  and  Earnings  of  Agricultural 
Laborers  (1900  and  1901)  ;  Contracts  given  out  by  Public  Authori- 
ties ( 1 897)  ;  Wholesale  and  Retail  Prices  in  1902  ( 1 903)  ;  Employ- 
ment of  Women  and  Girls  (1894,  1898,  1899)  ;  Agencies  and 
Methods  for  Dealing  with  the  Unemployed  (1893  and  1904) ;  and 
J\iriff  Commission  Report,  Vol.  I,  The  Iron  Industry  (1904), 
Vol.  II,  part  i,  The  Cotton  Industry  (1905). 

The  most  important  reports  and  papers  are  summarized  and 
criticised  in  an  admirable  quarterly  review  by  Edwin  Cannan,  ap- 
pearing in  each  number  of  the  Economic  Review.  Messrs.  P.  S. 
King  &  Son,  of  London,  publish  a  convenient  Monthly  List  of 
Parliamentary  Papers  issued  in  the  preceding  month.  There 
is  also  a  General  Catalogue  of  the  Principal  Parliame?itary  Re- 
ports and  Papers  published  during  the  Nineteenth  Century 
(1801  to  1900),  with  prices,  and  in  many  cases  with  an  analysis 
of  contents. 

For  Australasia  the  best  conspectus  of  the  economic  situation 
may  be  found  in  the  annual  Statistical  Account  of  Australia  and 
New  Zealand,  by  T.  A.  Coghlan  (twelfth  issue,  1905),  with 
historical  sketches  and  comparative  summaries. 


Semi-Official  Publications.        xxxix 

For  Canada  an  excellent  summary  will  be  found  in  the  annual 
Statistical  Year  Book  of  Canada  issued  by  the  Department  of 
Agriculture,  and  covering  the  entire  economic  field. 

VI.   Semi-Official  Publications. 

The  publications  of  the  American  government  are  supple- 
mented by  a  great  mass  of  documents,  periodicals  and  reports, 
issued  by  private  and  quasi-public  associations.  Local  trade 
statistics  are  found  in  the  Reports  of  the  Chambers  of  Commerce 
of  the  principal  cities.  In  New  York  City  the  Chamber  of 
Commerce  frequently  publishes  valuable  reports  on  economic 
topics  of  state  and  national  significance.  Almost  every  im- 
portant branch  of  business  has  its  own  Trade  Journal,  many  of 
which  are  edited  with  great  ability. 

The  Bulletin  of  the  National  Association  of  Wool  Manufac- 
turers is  published  quarterly  since  1864  and  often  contains 
articles  of  scientific  merit.  The  Annual  Reports  of  the  Iron  and 
Steel  Association  also  deserve  mention.  In  some  cases  like  the 
Bankers'  Association  and  the  Manufacturers'  Association  an- 
nual conventions  are  held  and  extended  reports  issued.  The 
publications  of  the  Labor  Organizations  and  Trades  Unions 
are  voluminous.  The  National  Federation  of  Labor  issues  a 
weekly  Bulletin  and  a  Report  of  the  Annual  Convention. 

The  annual  reports  of  some  of  the  great  Railway  Systems, 
Insurance  Companies  and  Industrial  Corporations  can  generally 
be  secured  without  difficulty,  and  afford  interesting  side  lights 
on  economic  development.  Associations  like  the  Free  Trade 
League  ;  the  Asiatic  Association  ;  the  Irrigation  Congress  ;  the 
Sound  Money  League  ;  the  Farmers'*  Alliance  ;  the  Child  Labor 
Committee  ;  the  National  Live  Stock  Association  ;  the  National 
Good  Roads  Association  ;  the  Patrons  of  Husbandry  /  the  Na- 
tional Dairy  Association  ;  the  Stock  Breeders'  Association  ;  the 
Philadelphia  Commercial  Museum ;  the  National  Municipal 
League  ;  and  many  others  of  more  or  less  permanence,  issue 
fugitive,  or  periodical  reports.  Among  the  most  important  of 
such  semi-official  publications  are  those  of  the  Merchants' 
Association  of  New  York  and  of  the  National  Civic  Federation. 


xl  Suggestions. 

The  former  has  issued  a  number  of  volumes,  among  them  the 
remarkable  Inquiry  into  the  Conditions  relating  to  the  Water 
Supply  of  the  City  of  New  York  (1900).  The  latter  pub- 
lishes annually  several  volumes  dealing  with  almost  every  phase 
of  the  relation  of  capital  and  labor,  and  treating  also  the  ques- 
tion of  taxation.  It  also  publishes  a  monthly  National  Civic 
Federation  Review.  Many  important  questions  of  social  con- 
ditions and  legislation  are  treated  in  the  annual  Proceedings  of 
the  National  Conference  of  Charities  and  Corrections. 

VII.    Bibliographies  and  Finding  Lists. 

A  series  of  bibliographies  has  recently  been  published  by  the 
national  government,  prepared  by  GRIFFIN,  APPLETON  PRENTISS 
CLARK,  chief  bibliographer  of  the  Library  of  Congress.  They 
are  as  follows : 

A  List  of  Books  (with  references  to  Periodicals}  relating  to  Rail- 
roads. (72  pp.,  1904.) 

A  List  of  Books  (with  references  to  Periodicals)  on  Mercantile 
Marine  Subsidies.  (100  pp.,  2d  ed.,  1903.) 

List  of  References  on  Reciprocity.     (38  pp.,  1902.) 

A  List  of  Books  (with  references  to  Periodicals)  relating  to  Trusts. 
(41  pp.,  2d  ed.,  1902.) 

Select  List  of  References  on  Industrial  A  rbitration.  ( [  I  pp.,  1903 . ) 
Select  List  of  References  on  Chinese  Immigration.  (31  pp.,  1904.) 

A  List  of  Books  (with  references  to  Periodicals)  on  Immigration. 
(76  pp.,  1904.) 

A  List  of  the  more  Important  Books  on  Banks  and  Banking. 
(55  PP-,  I904-) 

List  of  References  on  Federal  Control  of  Commerce  and  Corpora- 
tions. (22  pp.,  1904.) 

Select  List  of  References  on  the  British  Tariff  Movement.  (37  pp., 
1904.) 

Other  good  bibliographies  on  special  subjects  are  : 
MAROT,  HELEN.     Handbook  of  Labor  Literature..     (1899.) 


Bibliographies.  xli 

BROOKS,  R.  C.  Bibliography  of  Municipal  Problems  (in  Munici- 
pal Affairs,  Vol.  V,  1901.) 

The  Boston  Public  Library  has  published  two  useful  works : 

A  List  of  Books  on  Social  Reform  in  the  Public  Library  of  the 
City  of  Boston .  ( 1 898.) 

Economics  :  Selected  Works  in  the  English  Language.  (1904.)  — 
Compiled  by  BENJ.  RAND. 

The  three  most  complete  bibliographies  on  socio-economic 
topics  are  in  German : 

BERNSTEIN,  EDOUARD.  Bibliographie  des  Sozialismus  und  der 
Sozialivissenschaften  in  each  number  of  Dokumente  des  Sozial- 
ismus. (1901-.)  —  Annotated  and  valuable. 

STAMMHAMMER,  JOSEF.  Bibliographie  des  Socialismus  und  Com- 
munismus.  (2  vols.,  1893-1900.) 

STAMMHAMMER,  JOSEF.    Bibliographie  der  Social- Politik.   (1896.) 

The  only  general  bibliography  in  English  is  the  short  work 
of  BOWKER,  R.  R.,  and  ILES,  GEORGE  S.,  The  Readers'  Guide 
in  Economics,  Social  and  Political  Science.  (1891.) 

A  comprehensive  annual  bibliography  is  published  by  the 
International  Institute  of  Bibliography  under  the  title  Biblio- 
graphia  Economica  Universalis.  It  now  appears  in  instalments 
in  the  Revue  Economique  Internationale. 

The  most  convenient  bibliographies  of  current  works  are 
found  under  the  rubric  "  Recent  Publications  upon  Economics," 
published  at  the  end  of  each  issue  of  The  Quarterly  journal 
of  Economics ;  and  in  a  somewhat  fuller  Uebersicht  iiber  die 
neuesten  Publikationen  in  Conrad's  Jahrbilcher  fur  National- 
b'konomie  und  Statistik. 

VIII.   List  of  Books   to  which  Abbreviated  References  are 
made  in  the  Bibliographies  at  the  Heads  of  Chapters. 

ASHLEY,  W.  J.  An  Introduction  to  English  Economic  History 
and  Theory.  (2  vols.,  London,  1888-1893.) 

ASHLEY,  W.  J.  Surveys,  Historic  and  Economic.  (London, 
1900.) 


xlii  Suggestions. 

BAGEHOT,  WALTER.     Economic  Studies.     (London,  1880.) 

BOHM-BAWERK,  EUGEN  VON.  The  Positive  7  heory  of  Capital. 
(Trans,  by  Smart,  London,  1891.) 

BOWLEY,  ARTHUR  L.     Elements  of  Statistics.     (London,  1901.) 

BiiCHER,  CARL.  Industrial  Evolution.  (Trans,  from  the  3d 
German  edition  by  S.  Morley  Wickett,  New  York,  1901.) 

CAIRNES,  J.  E.  The  Character  and  Logical  Method  of  Political 
Economy.  (London,  1857  ;  2d  ed.,  1875.) 

CAIRNES,  J.  E.  Some  Leading  Principles  of  Political  Economy, 
newly  Expounded.  (London,  1874.) 

CANNAN,  EDWIN.     A  History  of  the  Theories  of  Production  and 
Distribution  in  English  Political  Economy  from  1776  to  1848 
(London,  1893  ;  2d  ed.,  1904.) 

CARVER,  THOMAS  NIXON.  The  Distribution  of  Wealth.  (New 
York,  1904.) 

CLARK,  JOHN  BATES.  The  Distribution  of  Wealth.  (New  York, 
1899.) 

CLARK,  JOHN  BATES.  The  Philosophy  of  Wealth.  (Boston, 
1886.) 

COSSA,  LUIGI.  An  Introduction  to  the  Study  of  Political  Econ- 
omy. (Trans,  by  Louis  Dyer,  London,  1893.) 

CUNNINGHAM,  W.  An  Essay  on  Western  Civilization  in  its 
Economic  Aspects.  Ancient  Times.  (London,  1898.)  Mediczval 
and  Modern  Times.  (London,  1900.) 

CUNNINGHAM,  W.  The  Growth  of  English  Industry  and  Com- 
merce. Early  and  Middle  Ages.  (4th  ed.,  London,  1905.) 
Modern  Times.  (3d  ed.,  2  vols.,  London,  1903.) 

DEWEY,  DAVIS  R.  Financial  History  of  the  United  States. 
(Am.  Citizen  Series,  New  York,  2d  ed.,  1903.) 

ELY,  RICHARD  T.  Studies  in  the  Evolution  of  Industrial  So- 
ciety. (New  York,  1903.) 

FETTER,  FRANK  A.  The  Principles  of  Economics.  (New  York, 
1904) 

FLUX,  A.  W.  Economic  Principles,  an  Introductory  Study. 
(London,  1904.) 


Select  Books.  xliii 

GIFFEN,  ROBERT.  Economic  Inquiries  and  Studies.  (2  vols., 
London,  1904.) 

HADLEY,  ARTHUR  TWINING.  Economics.  An  Account  of  the 
Relations  between  Private  Property  and  Public  Welfare.  (New 
York,  1896.) 

HADLEY,  ARTHUR  TWINING.  The  Relations  between  Freedom 
and  Responsibility  in  the  Evolution  of  Democratic  Government. 
(New  York,  1903.) 

HEARN,  WILLIAM  EDWARD.  Plutology ;  or  The  Theory  of  the 
Efforts  to  Satisfy  Human  Wants.  (London,  1864.) 

HOBSON,  JOHN  A.  The  Economics  of  Distribution.  (New  York, 
1900.) 

HOBSON,  JOHN  A.  The  Evolution  of  Modern  Capitalism.  (Lon- 
don, 1894.) 

JENKS,  EDWARD  A.     A  History  of  Politics.     (London,  1900.) 

JEVONS,  W.  STANLEY.  Investigations  in  Currency  and  Finance. 
(London,  1884.) 

JEVONS,  W.  STANLEY.  Methods  of  Social  Reform.  (London, 
1883.) 

JEVONS,  W.  STANLEY.  Money  and  the  Mechanism  of  Exchange. 
(London,  1879.) 

JEVONS,  W.  STANLEY.  The  Principles  of  Economics.  (London, 
1905.) 

JEVONS,  W.  STANLEY.  The  Theory  of  Political  Economy.  (Lon- 
don, 1871  ;  3d  ed.,  1888.) 

JOHNSON,  ALVIN  S.  Rent  in  Modern  Economic  Theory.  "In 
American  Economic  Association  Publications.  (3d  Series, 
Vol.  Ill,  New  York,  1902.) 

KEYNES,  J .  The  Scope  and  Method  of  Political  Economy.  (  Lon- 
don, 1891 ;  3d  ed.,  1904.) 

MAINE,  HENRY  SUMNER.  Ancient  Law.  (London,  1861 ;  8th  ed., 
1880.) 

MAINE,  HENRY  SUMNER.  Lectures  on  the  Early  History  of  In- 
stitutions. (London,  1875  5  3^  ed.,  1880.) 


xliv  Suggestions. 

MAINE,  HENRY  SUMNER.  Village  Communities  in  the  East  and 
West.  (London,  1871 ;  4th  ed.,  1881.) 

MARSHALL,  ALFRED.  Principles  of  Economics.  (Vol.  I,  Lon- 
don, 1890;  4th  ed.,  1898.) 

MAYO-SMITH,  RICHMOND.  Science  vf  Statistics,  part  i.  Statistics 
and  Sociology .  (New  York,  1895.) 

MAYO-SMITH,  RICHMOND.  Science  of  Statistics,  part  2.  Statis- 
tics and  Economics.  (New  York,  1899.) 

MEADE,  E.  S.     Trust  finance.     (New  York,  1903.) 

MILL,  JOHN  STUART.  Principles  of  Political  Economy,  with  some 
of  their  Applications  to  Social  Philosophy.  (2  vols.,  London, 
1848;  5th  ed.,  1880.) 

NICHOLSON,}.  SHIELD.  Principles  of  Political  Economy.  (3  vols., 
London,  1893-1901.) 

NICHOLSON,  J.  SHIELD.  The  Effects  of  Machinery  on  Wages. 
(New  ed.,  London,  1892.) 

NICHOLSON,  J.  SHIELD.  Strikes  and  Social  Problems.  (London, 
1896.) 

PANTALEONI,  MAFFEO.  Pure  Economics.  (Trans,  by  Bruce, 
London,  1898.) 

PATTEN,  SIMON  N.  The  Consumption  of  Wealth.  (Philadel- 
phia, 1889.) 

PATTEN,  SIMON  N.  The  Development  of  English  Thought;  A 
Study  in  the  Economic  Interpretation  of  History.  (New  York, 
1899.) 

PATTEN,  SIMON  N.  The  Theory  of  Dynamic  Economics.  (Phila- 
delphia, 1892.) 

PAYNE,  E  J.  History  of  the  New  World  called  America.  (2  vols., 
London,  1892-1899.) 

PIERSON,  N.  G.  Principles  of  Economics.  (Trans,  by  A.  A. 
Wotzel,  Vol.  I,  London,  1902.) 

RICARDO,  DAVID.  Principles  of  Political  Economy  and  Taxa- 
tion. (London,  1817.) 


Select  Books.  xlv 

Ross,  EDWARD  A.    Foundations  of  Sociology.     (New  York,  1905.) 

SEAGER,  HENRY  ROGERS.  Introduction  to  Economics.  (New 
York,  1904.) 

SELIGMAN,  EDWIN  R.  A.  The  Economic  Interpretation  of  His- 
tory. (New  York,  1902.) 

SELIGMAN,  EDWIN  R.  A.  Essays  in  Taxation.  (New  York, 
1895;  5th  ed.,  1905.) 

SELIGMAN,  EDWIN  R.  A.  The  Shifting  and  Incidence  of  Taxa- 
tion. (New  York,  1892;  2d  ed.,  1899.) 

SIDGWICK,  HENRY.  The  Principles  of  Political  Economy.  (Lon- 
don, 1883.) 

SMART,  WILLIAM.     The  Distrfaition  of  Income.     (London,  1899.) 

SMART,  WILLIAM.  An  Introduction  to  the  Theory  of  Value. 
(London,  1891.) 

SMART,  WILLIAM.     Studies  in  Economics.     (London,  1895.) 

SMITH,  ADAM.  An  Inquiry  into  the  Nature  and  Causes  of  the 
Wealth  of  Nations.  (2  vols.,  London,  1776.  Best  edition  by 
Edwin  Cannan,  1904.) 

VEBLEN,  THORSTEN.  The  Theory  of  Business  Enterprise.  (New 
York,  1904.) 

WALKER,  FRANCIS  A.  Political  Economy,  Advanced  Course. 
(New  York,  1883  ;  3d  ed.,- 1888.) 

WALKER,  FRANCIS  A.  The  Wages  Question;  A  Treatise  on 
Wages  and  the  Wages  Class.  (New  York,  1876.) 

WALSH,  CORREA  MOYLAN.  The  Measurement  of  General  Ex- 
change Value.  (London,  1901.) 

WEBB,  SIDNEY  and  BEATRICE.  The  History  of  Trade  Unionism. 
(London,  1894.) 

WEBB,  SIDNEY  and  BEATRICE.  Industrial  Democracy.  (2  vols., 
London,  1894;  2d  ed.  in  i  vol.,  1904.) 

WEBB,  SIDNEY  and  BEATRICE.  Problems  of  Modern  Industry. 
(London,  1898.) 


xlvi  Suggestions. 

WEBER,  ADNA  F.  The  Growth  of  Cities  in  the  Nineteenth  Cen- 
tury —  A  Study  in  Statistics,  in  Columbia  Studies  in  History, 
Economics  and  Public  Law.  (Vol.  XI,  New  York,  1899.) 

WIESER,  FRIEDRICH  VON.  Natural  Value.  (Edited  by  W. 
Smart;  trans,  by  C.  Malloch,  London,  1893.) 

WRIGHT,  CARROLL  D.  Outline  of  Practical  Sociology.  (Amer- 
ican Citizen  Series,  5th  ed.,  New  York,  1904.) 


Principles  of  Economics. 


Principles  of  Economics. 


Part   I. 

Introduction. 

.  CHAPTER   I. 
FUNDAMENTAL  CONCEPTS. 

1.  References. 

A.  Marshall,  Principles  of  Economics  (4th  ed.,  1898),  bk.  ii;  J.  B.  Clark, 
Philosophy  of  Wealth  (1886),  ch.  i,  and  Distribution  of  Wealth  (1899),  ch.  ix ; 
W.  E.  Hearn,  Plutology  (1864),  ch.  i ;  W.  Smart,  Distribution  of  Income 
(1899),  bk.  i ;  A.  T.  Hadley,  Economics  (1896),  ch.  i ;  F.  A.  Fetter,  Prin- 
ciples of  Economics  (1904),  chs.  ii,  iii ;  J.  S.  Nicholson,  Principles  of  Politi- 
cal Economy  (1903),  Introd. ;  H.  Sidgwick,  Principles  of  Political  Economy 
(1883),  bk.  i,  ch.  iii ;  F.  A.  Walker,  Political  Economy  (3d  ed.,  1888),  part  i  ; 
A.  W.  Flux,  Economic  Principles  (1904),  ch.  i ;  E.  Caiman,  History  of  the 
Theories  of  Production  and  Distribution  (2d  ed.,  1904),  ch.  i;  H.  R.  Sea- 
ger,  Introduction  to  Economics  (1904),  ch.  iii ;  M.  Pantaleoni,  Pure  Econo- 
mics (1898),  part  I,  ch.  v;  W.  S.  Jevons,  Principles  of  Economics  (1905), 
chs.  iii,  iv,  viii;  C.  A.  Tuttle,  The  Fundamental  Economic  Principle  (Quart. 
Jour.  Econ.,  XV,  1901). 

2.  Economic  Life. 

The  starting-point  of  all  human  activity  is  the  existence  of 
wants.  To  satisfy  hunger  and  thirst,  to  secure  shelter  and  to 
provide  clothing  were  the  chief  aims  of  primitive  man,  and 
constitute  even  to-day  the  motor  forces  of  all  society.  As  man 
develops,  his  wants  grow  in  number  and  refinement.  However 
civilized  he  becomes,  his  material  welfare  forms  the  basis  on 
which  the  whole  larger  life  is  erected.  To  secure  the  means  of 
satisfying  wants  brings  into  play  the  economic  activity  of  man. 
The  process  may  be  expressed  in  the  words  —  wants,  efforts, 

3 


4  Fundamental  Concepts.  [§  2 

satisfactions.  We  start  out  with  the  existence  of  wants,  we 
desire  to  secure  their  satisfaction,  we  can  ordinarily  accomplish 
this  only  through  some  effort.  The  economic  life  of  man  is 
concerned  with  such  efforts  and  their  results. 

The  sum  of  all  one's  possessions,  including  at  the  time 
slaves,  wife  and  children,  was  termed  by  the  Greeks  ecos 
(OIKOS)  ;  and  the  method  of  managing  them  was  called  eco- 
nomics (otfcopo/uKi?)  — the  control  or  rule  (vo/xos)  of  the  house- 
hold (oucos).  We  still  speak  of  the  economical  man  as  the 
one  who  orders  the  affairs  of  his  household,  who  manages  his 
possessions,  with  prudence  and  success.  In  the  wider  sense, 
whether  he  achieves  success  or  not,  the  economic  activity  of 
man  looks  to  a  provision  of  the  material  means  to  satisfy  his 
wants  and  those  of  his  household.  The  science  which  deals 
with  these  economic  activities  is  called  economics  or  political 
economy. 

Business  means  etymologically  the  state  of  being  busy.  The 
fundamental  thing  about  which  all  men  must  ordinarily  busy 
themselves  is  the  satisfaction  of  their  wants.'  To  attain  first 
a  competence  and  then  a  surplus,  to  provide  for  one's  liveli- 
hood and  then  to  secure  a  profit,  is  the  essence  of  business 
activity.  Economics  might  therefore  equally  well  be  defined 
as  the  science  of  business  activities. 

The  motive  that  guides  men  in  their  economic  life  is  some- 
times described  as  the  economic  motive.  It  may  best  be 
defined  as  the  motive  which  impels  every  human  being  to 
satisfy  his  wants  with  the  smallest  possible  effort,  or  which 
leads  him  to  secure  the  most  pleasure  with  the  least  pain.  The 
existence  of  such  a  motive  is  undeniable ;  it  is  in  fact  of  deep 
and  abiding  importance ;  it  may  even  be  declared  the  para- 
mount consideration  in  the  working  out  of  economic  law. 
We  must,  however,  not  forget  that  this  is  not  the  only  influence 
at  work  in  economic  life.  Human  beings  are  impelled  by 
other  motives  as  well ;  and  these  other  motives  may  often  exert 
a  perceptible  influence  in  economic  life.  The  study  of  eco- 
nomic history  shows  us  that  religious,  political  and  ethical 


§  2]  Economic  Life.  5 

considerations  have  profoundly  modified  economic  action  itself. 
In  the  economic  life  of  a  primitive  Christian  community  the 
economic  motive  was  of  very  different  importance  from  that  of 
modern  industrial  life.  Even  in  modern  times  the  economic 
motive  is  not  equally  strong  everywhere,  or  equally  free  from 
the  admixture  of  other  influences.  The  Indian  ryot  is  not 
like  the  American  farmer  in  his  desire  to  "  get  ahead."  The 
negro  laborer  in  the  South  is  not  so  amenable  to  the  economic 
motive  as  the  stock  exchange  broker.  The  salary  of  a  govern- 
ment employee  who  hopes  for  official  decorations  cannot  be 
explained  in  the  same  way  as  the  wages  of  a  carpenter.  An 
analysis  of  all  the  motives  that  influence  men  in  their  economic 
life  belongs  to  social  psychology,  and  would  disclose  widely 
varying  effects  at  different  times  and  places,  as  well  as  in 
different  individuals  or  Classes  at  the  same  time  or  place.  In 
searching  for  the  fundamental  laws  of  economics  it  is  conven- 
ient to  exclude  all  motives  save  the  economic,  since  the  latter 
is  the  one  of  basic  significance,  and  since  it  would  otherwise  be 
impossible  to  formulate  economic  theory  in  general  terms.  In 
applying  the  law  to  actual  life,  however,  we  must  be  careful  to 
study  how  its  operation  is  modified  by  the  other  —  even  though 
minor  —  motives  which  affect  economic  action. 

If  the  "  economic  motive  "  is  thus  open  to  misconception 
as  explaining  the  whole  economic  life,  the  so-called  "eco- 
nomic man  "  is  a  complete  abstraction.  By  the  "  economic 
man  "  is  meant  the  human  being  dominated  by  the  economic 
motive.  Such  a  man,  however,  does  not  really  exist.  Not 
only  do  other  motives  affect  the  economic  life,  but  side  by  side 
with  the  economic  life  itself  are  the  aesthetic  life,  the  religious 
life,  the  intellectual  life  and  the  multiplicity  of  other  human 
activities.  It  is  indeed  the  function  of  economics  to  study 
that  aspect  of  human  activity  known  as  the  economic  life. 
We  must,  however,  not  forget  that  we  are  studying  man  in  only 
one  phase  of  his  existence.  Although  there  is  both  an  eco- 
nomic and  a  religious  life,  there  is  no  economic  man,  just  as 
there  is  no  separable  religious  man.  The  business  man  has  his 


6  Fundamental  Concepts.  [§  3 

family,  just  as  the  clergyman  has  an  appetite.  The  conclusions 
of  economic  science,  therefore,  are  provisional,  not  final,  con- 
clusions with  reference  to  the  conduct  of  life  in  general. 

3.  Economics  or  Political  Economy? 

Civilized  man  cannot  be  thought  of  apart  from  society.  In 
fact  human  beings,  whether  civilized  or  not,  have  from  the 
outset  lived  in  some  form  of  social  union.  Robinson  Crusoe  is 
not  a  type,  but  an  anomaly.  Without  society  man  could  never 
have  developed.  There  would  be  no  such  thing  as  speech, 
morals,  law  or  order.  Economic  life  deals  with  man  as  exist- 
ing in  society.  Economics  is  hence  a  social  science. 

Economics,  however,  is  not  the  whole  of  social  science. 
There  are  as  many  divisions  of  social  science  as  there  are 
important  classes  of  social  relations.  Jurisprudence  deals  with 
the  legal  relations  of  society,  with  certain  usages  and  customs 
which  have  received  the  sanction  of  precedent  and  have  been 
crystallized  into  law.  Ethics,  or  the  science  of  morals,  deals 
with  another  important  group  of  social  relations,  for  individual 
standards  of  conduct  can  be  understood  only  in  their  relation 
to  social  ethics.  Politics  treats  of  the  social  relations  of  man 
looked  upon  as  a  member  of  organized  society  or  the  state  ; 
it  discusses  the  connection  between  the  individual  and  the 
government.  Sociology,  or  the  fundamental  social  science, 
deals  with  society  as  a  whole,  and  studies  certain  general  prin- 
ciples that  lie  at  the  basis  of  each  of  the  separate  social  sciences. 
Economics  is  one  of  these  separate  social  sciences.  The  ethi- 
cal, the  legal,  the  political  and  the  economic  relations  of  men 
are  all  outgrowths  of  social  life ;  and  what  is  common  to  them 
all  falls  within  the  province  of  sociology. 

Why,  then,  do  we  speak  of  political  economy?  It  may  be 
frankly  confessed  that  the  term  is  inexact.  In  one  sense 
politics,  as  we  have  seen,  is  simply  a  branch  of  social  science. 
Politics  deals  with  the  state  ;  but  the  state  is  organized  society. 
It  is  composed  of  individuals  and  cannot  be  conceived  as 
apart  from  individuals.  Yet  when  we  use  the  term  political 


§  3]  Proper  Term.  7 

science,  stress  is  ordinarily  laid  on  the  state ;  when  we  speak 
of  social  science,  the  emphasis  is  put  on  individuals  as  mem- 
bers of  society.  It  so  happens  that  when  the  term  political 
economy  was  first  used  by  the  Greeks,  they  thought  only  of 
the  former  meaning.  Aristotle,  after  discussing  domestic 
economy,  tells  us  that  states  also,  like  individuals,  must  make 
both  ends  meet.  There  is,  he  says,  a  regal  economy,  or  the 
art  of  managing  the  public  household  in  monarchies ;  there  is 
a  provincial  economy,  best  suited  to  provinces;  and  finally 
there  is  a  political  economy,  best  suited  to  the  "  polis,"  or  free 
state.  Political  economy  therefore  is  to  him  substantially  the 
art  of  providing  a  revenue  for  the  state.  When  the  subject 
was  again  discussed  at  the  close  of  the  middle  age's,  it  was 
seen  that  the  revenue  of  the  state  depends  upon  the  revenue 
of  the  people,  and  political  economy  was  now  conceived  of 
as  the  art  of  making  a  people  wealthy  and  powerful  through 
national  development.  It  was  soon  recognized,  however,  that 
national  progress  depends  chiefly  upon  the  efforts  of  the  indi- 
viduals themselves.  Thus  in  more  recent  times  the  stress 
has  come  to  be  laid  on  the  causes  which  condition  the  eco- 
nomic advance  of  the  various  classes  of  society,  and  since  the 
emphasis  is  now  put  on  the  social  rather  than  on  the  political 
causes,  the  science  which  deals  with  these  problems  is  properly 
called  social  economics  or,  more  briefly,  economics. 

The  world,  however,  is  conservative;  and  the  old  term 
political  economy,  which  arose  in  former  centuries  when 
attention  was  centred  on  the  political  side,  is  still  often  used. 
Strictly  speaking,  we  ought  to  employ  the  term  political  econ- 
omy only  when  we  treat  of  the  political  aspect  of  economic 
relations,  that  is,  of  their  direct  dependence  upon  government 
action.  People  forget  that  economic  activity  is  primarily 
social,  and  only  in  part  influenced  by  political  considerations. 
The  force  of  habit  makes  them  say  political  economy  when 
they  really  mean  social  economics  or  economics  proper. 

The  foregoing  explains  the  reason  for  dropping  the  first 
half  of  the  old  term,  political  economy.  The  change  in  the 


8  Fundamental  Concepts.  [§  4 

second  half  is  due  to  another  cause, — the  recognition  of  the 
scientific  character  of  the  study.  Many  modern  sciences  end 
with  the  suffix  "  ics,"  as  physics,  politics  or  mathematics. 
When  the  writers  of  the  seventeenth  and  eighteenth  centuries 
first  adopted  the  Greek  phrase,  they  had  in  mind  the  endeavor 
to  augment  the  wealth  or  "  economy  "  of  the  state.  Hence,  the 
term.  The  transition  from  the  point  of  view  of  an  art  to  that 
of  a  science  has  substituted  for  the  old  phrase  the  newer  name 
—  economics,  that  is,  the  science  that  deals  with  the  economy 
of  society  and  of  the  individuals  of  which  it  is  composed. 

4.  The  Meaning  of  Wealth. 

It  is  evident  from  what  has  been  said  that  economic  activity 
is  concerned  with  wealth.  In  fact  economics  is  often  called 
the  science  of  wealth.  But  what  is  wealth  ? 

To  the  ordinary  man  wealth  is  equivalent  to  money.  When 
we  look  a  little  deeper,  however,  we  see  that  what  he  means 
is  not  money,  but  money's  worth.  A  man's  wealth  nowa- 
days consists  of  anything  which  can  be  obtained,  or  sold,  for 
money.  But  this  is  only  a  secondary  meaning.  Money  is  an 
institution  of  comparatively  recent  date ;  there  was  wealth 
before  there  was  money.  Nor  will  it  suffice  to  say  that  wealth 
is  that  for  which  something  else  can  be  procured  through  ex- 
change. For  although  there  were  exchanges  in  the  shape  of 
barter  before  there  was  any  money,  wealth  existed  even  before 
men  exchanged  their  possessions.  The  fundamental  idea  is 
something  deeper.  There  are  really  three  characteristics. 

(i)  Originally  wealth,  as  the  word  implies,  denoted  weal  or 
well-being.  Whatever  a  man  had  in  abundance  constituted  his 
wealth,  because  it  afforded  him  a  surplus.  It  made  him  well 
off.  The  capacity  of  anything  to  satisfy  a  human  desire  is 
called  its  utility.  When  we  speak  of  the  utility  of  a  thing, 
however,  we  do  not  pass  any  judgment  upon  its  moral  qualities. 
Whisky  and  opium  may  be  injurious,  yet  so  far  as  they  satisfy 
existing  wants  they  possess  utility.  They  are  called  goods 
because  they  are  good  for  the  satisfaction  of  some  want,  no 


§  4]  Meaning  of  Wealth.  9 

matter  how  reprehensible  that  want  may  be.  In  order  for 
anything  to  constitute  wealth,  the  first  requisite  is  that  it  should 
possess  utility,  that  is,  the  capacity  to  satisfy  some  desire. 
This,  however,  does  not  suffice.  Not  all  desirable  things  con- 
stitute wealth.  The  conception  must  be  further  limited. 

(2)  The  second  characteristic  of  wealth  is  that  it  must  be 
something  external  to  man.  Personal  or  internal  goods  are  a 
contradiction  in  terms.  What  is  meant  is  personal  or  internal 
qualities  which  are  bound  up  with  the  individual  himself,  like 
his  physical,  mental  or  moral  characteristics.  Health  is  not 
wealth,  although  it  may  be  the  basis  of  wealth.  Man  cannot 
part  with  these  qualities ;  he  can  only  embody  them  in  some 
product  which  will  be  serviceable  to  others.  His  personal 
qualities  may  thus  enable  him  to  acquire  wealth,  but  they  do 
not  themselves  constitute  wealth.  To  speak  of  personal  wealth 
in  any  but  a  metaphorical  sense,  as  a  wealth  of  humor  or  good 
spirits,  is  to  confuse  the  fundamental  distinction  between  man 
and  his  environment.  Wealth  exists  for  man,  but  man  himself 
is  not  wealth  (unless  indeed  he  is  a  slave,  and  then  he  is  wealth, 
not  to  himself,  but  to  some  one  else).  Wealth  may  be  produced 
by  man,  but  it  is  the  product,  not  the  producer,  that  constitutes 
wealth.  The  things  that  form  wealth  are  always  outside  of 
man ;  they  are  external,  not  internal,  phenomena. 

This  does  not  mean  that  wealth  is  necessarily  something  tan- 
gible. It  is  indeed  true  that  the  term  "  goods  "  is  sometimes 
preferred  to  "  commodities,"  because  the  latter  is  supposed 
to  imply  something  tangible.  "Commodity,"  however,  really 
means  that  which  "  accommodates  "  or  is  "  commodious  "  to  us, 
just  as  goods  are  those  things  that  are  "  good  for  us,"  —  both 
in  the  economic  sense.  If,  however,  we  use  "  commodity  "  to 
designate  some  tangible,  visible  object,  wealth  is  not  confined 
to  commodities.  Utilities  may  be  conferred  not  only  by  in- 
animate objects  but  by  human  services.  A  concert  satisfies  a 
want ;  what  we  pay  for  is  not  a  physical  object  but  a  service. 
A  teacher  receives  a  salary ;  what  he  gives  in  return  is  some- 
thing intangible.  Services  in  almost  every  case  bring  about 


io  Fundamental  Concepts.  [§  4 

some  change  in  man's  environment,  and  in  that  sense  even  a 
service  may  be  classed  as  something  material.  But  if  by  ma- 
terial we  mean  something  that  has  an  objective,  visible  exist- 
ence, a  service  must  be  considered  immaterial.  It  confers 
utilities,  it  is  external  to  man,  it  is  to  that  extent  wealth ;  but  it 
is  not  physical,  visible,  tangible  wealth.  Yet  the  higher  the 
civilization,  the  more  numerous  will  be  these  forms  of  impal- 
pable wealth. 

In  reality,  however,  the  distinction  between  commodities 
and  services  is  slighter  than  would  appear  at  first  blush.  For 
in  each  case  we  are  really  dealing  with  services.  The  sole  use 
of  a  commodity  is  the  series  of  services  which  it  can  render. 
Whether  the  music  which  we  hear  comes  from  a  music-box  or 
from  a  human  voice,  whether  the  boat  is  propelled  by  a  man 
or  an  engine,  is  of  no  consequence.  What  we  enjoy  in  each 
case  is  a  service.  The  only  difference  is  that  a  service  dis- 
appears in  the  rendering,  while  a  commodity  often  remains, 
and  is  capable  of  similar  services  in  future.  The  service  is 
evanescent,  the  commodity  is  often  durable.  The  commodity 
may  then  be  regarded  as  the  embodiment  of  a  series  of  stored 
up  services,  to  be  conferred  piecemeal.  But  the  distinction  is 
vague.  For  many  commodities,  like  coal,  ice-cream  and  the 
like,  disappear  in  the  very  act  of  rendering  a  service.  Dura- 
bility is  no  criterion  of  wealth.  An  ephemeral  service  may  be 
of  far  greater  importance  than  a  durable  commodity.  It  is  the 
character,  not  the  length  or  repetition,  of  the  service  which  we 
prize.  The  real  relation  between  a  concrete  commodity  and 
a  service  is  that  the  commodity  is  a  crystallized  service  or  a 
series  of  services.  The  essence  of  wealth  is  an  inflow  of  sat- 
isfactions :  utilities  consist  of  services,  whether  or  not  they 
are  embodied  in  physical  objects.  The  very  idea  of  a  ser- 
vice, however,  implies  something  that  flows  in  to  one  from 
the  outside,  whether  the  outside  be  a  man  or  an  object. 
Wealth  is  always  something  external. 

(3)  The  third  characteristic  of  wealth  is  limitation  of  supply. 
A  few  goods  and  services  exist  in  such  plenty  that  the  satisfac- 


§  4]  Meaning  of  Wealth.  1 1 

tion  of  our  wants  is  not  affected  by  any  consideration  of  the 
quantity  available.  The  deprivation  of  any  unit  in  the  supply 
will  make  no  difference  to  us.  We  all  need  air,  for  instance,  but 
in  ordinary  circumstances  air  is  free  to  all,  in  unlimited  quan- 
tities. Such  goods  are  therefore  called  free  goods.  The  vast 
majority  of  commodities,  however,  are  not  the  free  gift  of  na- 
ture. They  exist  in  such  limited  amounts  that  we  attach  im- 
portance to  definite  quantities.  If  we  wish  to  utilize  them,  we 
must  be  economical.  Hence  they  are  called  economic  goods 
and  form  the  subject  matter  of  the  science  of  economics. 

Putting  it  in  another  way,  it  may  be  said  that  while  all 
goods  that  render  a  service  possess  a  certain  kind  of  utility, 
only  economic  goods,  or  goods  limited  in  supply,  possess 
that  grade  of  utility  which  results  in  value.  As  we  shall  see 
later,  value  is  an  estimate  of  the  relative  importance  or  utility 
of  definite  quantities  of  goods.  When  we  speak  of  the  value 
of  a  diamond,  the  word  conveys  no  precise  meaning  unless 
we  know  how  large  and  pure  the  diamond  is.  When  we  say 
a  thing  is  useful,  we  do  not  measure  its  grade  of  utility ;  but 
when  we  say  a  thing  is  valuable  or  worth  something,  we  at 
once  ask  :  how  much  ?  In  the  case  of  free  goods,  by  which  we 
mean  goods  the  amount  of  which  is  unlimited,  we  attach  no 
importance  to  any  particular  quantity,  that  is,  we  set  no  value 
on  it.  Wealth  might  therefore  be  denned  as  composed  of  things 
that  possess  value,  and  economics  would  then  be  the  science 
of  value. 

In  what  has  preceded  we  have  virtually  affirmed  that  wealth 
means  abundance,  and  at  the  same  time  connotes  limitation 
of  supply.  This  seems  absurd.  The  apparent  absurdity,  how- 
ever, is  removed  by  the  statement  that  wealth  consists  of  an 
abundance  of  things  limited  in  supply.  If  the  supply  is  lim- 
ited, man  will  make  an  effort  to  secure  them  ;  the  more  scarce 
they  are,  the  more  valuable  they  will  be  and  the  more  effort 
he  will  make.  Economic  action  consists  in  getting  the  great- 
est results  with  the  least  effort.  Anything  which  will  afford  us 
the  same  services  with  less  effort  will  set  free  surplus  energy  for 


1 2  Fundamental  Concepts.  [§  4 

other  purposes,  and  thus  increase  our  wealth.  The  irrigation 
tracts  in  the  West  represent  much  effort  and  much  wealth ; 
if  water  were  to  become  as  plentiful  there  as  in  the  East,  the 
wealth  of  the  country  would  be  increased,  because  all  the 
efforts  devoted  to  securing  water  would  now  be  devoted  to 
something  else,  let  us  say  to  building  railways.  The  water 
would  no  longer  be  wealth,  just  as  the  air  is  not  wealth,  but 
there  would  be  more  wealth  than  before  because  there  would 
be  a  larger  total  inflow  of  satisfactions.  Before,  we  had  only 
the  water ;  now  we  have  the  water  and  the  railroads. 

This  also  explains  the  seeming  opposition  between  wealth 
and  value.  Wealth  is  composed  of  things  having  value,  and 
yet  the  more  we  have  of  anything,  the  less  its  value.  This 
statement  overlooks  the  fact  that,  as  we  shall  see  later  (  §  76  ), 
value  is  an  expression  of  the  relative  importance  of  goods, 
while  wealth  denotes  an  aggregate  of  goods  possessing  value. 
In  the  example  above,  the  value  of  water  indeed  disappeared, 
but  was  replaced  by  that  of  railroads,  previously  not  existing. 
The  reduced  value  of  a  commodity  whose  quantity  increases 
may  be  compensated  by  the  new  value  of  something  which 
did  not  exist  before  ;  but  the  aggregate  of  wealth  may  be 
augmented.  Thus  increasing  wealth  does  not  mean  decreasing 
value  in  general,  for  the  lower  value  of  some  things  is  balanced 
by  the  higher  value  of  new  things.  An  increase  of  commodities 
can  never  of  itself  engender  a  decrease  of  wealth. 

To  recapitulate,  in  order  to  constitute  wealth,  a  commodity 
or  service  must  have  three  qualities.  First,  it  must  possess 
utility  :  if  the  thing  is  of  no  use,  it  is  not  a  good  at  all. 
Secondly,  it  must  be  external  to  the  individual :  a  man  may 
be  skilful  or  intelligent,  but  he  is  not  wealthy  until  he  has 
transmuted  his  skill  into  some  actual  result.  Thirdly,  it  must 
be  limited  in  amount :  if  it  is  free  to  all,  it  may  make  him 
happy,  but  its  possession  will  not  differentiate  him  from  his 
neighbor,  and  he  will  attach  no  specific  value  to  it. 

Since  modern  society  is  based  on  the  interchange  of  posses- 
sions, all  this  can  be  summed  up  in  the  statement  that  wealth 


§  5]  Wealth  and  Man.  i  3 

is  nowadays  anything  that  can  be  exchanged.  If  it  is  not 
useful,  no  one  will  want  it ;  if  it  is  not  external,  no  one  can 
part  with  it ;  if  it  is  not  limited  in  quantity,  no  one  will  give  any- 
thing for  it.  Historically  and  fundamentally,  however,  wealth 
is  anterior  to  exchange.  Things  do  not  possess  value  because 
they  are  exchanged ;  they  are  exchanged  because  they  possess 

value. 

5.   Wealth  and  Man. 

Wealth,  then,  forms  the  subject  matter  of  economics.  But 
in  what  sense  ? 

If  a  man  chops  down  a  tree  for  firewood,  he  is  adding  to 
his  wealth.  Yet  a  discussion  of  the  best  axe  to  be  used  would 
not  be  an  economic  discussion.  We  all  need  light ;  yet  a  study 
of  the  relative  merits  of  gas  and  electricity  would  not  necessa- 
rily be  economic  in  character.  We  may  study  wealth  from 
the  technical  as  well  as  from  the  economic  point  of  view. 
The  technical  study  explains  the  qualities  of  the  thing  itself  or 
in  relation  to  other  things  :  economics  deals  with  these  qualities 
only  in  their  relations  to  man.  A  study  of  the  relative  merits 
of  axes  would  be  technical ;  a  study  of  the  income  derived 
from  tree-felling  is  economic.  (Economics  is  therefore  the 
science  of  man  in  his  business  relations  to  wealth.  The 
emphasis  is  to  be  put  on  the  human  rather  than  on  the  mate- 
rial side  of  the  problem.  Since  wealth'  in  its  economic  aspects 
consists  of  anything  that  has  commercial  value,  economics 
may  also  be  defined  as  the  science  of  value,  in  the  sense  of 
the  science  of  human  relations  so  far  as  they  are  affected  by 
value. 

Wealth  is  at  bottom  a  surplus  of  satisfactions.  We  may 
therefore  approach  the  subject  from  either  side,— ~ that  of  satis- 
faction or  of  want.  In  other  words,  in  dealing  with  the  goods 
that  constitute  wealth  we  must  be  mindful  not  only  of  their 
acquisition,  but  also  of  their  use ;  not  only  of  their  production, 
but  also  of  their  consumption.  In  order  to  grasp  the  real 
meaning  of  wealth,  we  must  ask  not  only,  what  have  you  got? 
but,  what  do  you  do  with  it? 


14  Fundamental  Concepts.  [§  5 

If  a  savage  were  to  find  a  watch  on  the  seashore,  he  might 
prize  it  as  a  trinket.  As  a  watch  it  would  be  of  no  use  to  him. 
For  watches  to  have  any  material  value  presupposes  a  society 
considerably  advanced  in  intelligence.  The  same  commodities 
may  be  relatively  valueless  to  one  generation  and  exceedingly 
valuable  to  another.  At  bottom  it  is  demand  which  sets  in 
motion  those  forces  which  result  in  giving  a  thing  value.  The 
social  demand  for  a  thing  is  due  to  the  uses  to  which  it  can  be 
put.  But  the  uses  to  which  it  can  be  put  depend  not  only  on 
the  thing  to  be  used  but  on  the  individuals  who  use  it.  Wealth 
therefore  depends  in  the  last  instance  on  man. 

Wealth  can  be  increased  only  through  the  multiplication  and 
better  utilization  of  commodities.  The  more  and  better  the 
commodities,  the  wealthier  the  population  as  a  whole.  This 
multiplication  can  take  place  only  in  obedience  to  an  increased 
demand.  Increased  demand,  however,  means  a  diversification 
of  wants.  People  now  want  more  things  of  different  kinds  than 
in  the  earlier  stages  of  society.  The  things  they  want,  however, 
depend  in  last  resort  upon  their  aesthetic,  intellectual  and  moral 
conditions.  The  physical  appetite  of  civilized  man  differs  from 
that  of  the  savage  only  in  its  being  more  refined,  —  that  is, 
more  aesthetic.  It  differs  not  in  quantity,  but  in  quality.  His 
other  appetites  also  change  with  the  development  of  civiliza- 
tion. The  economic  life  is  therefore  ultimately  bound  up  with 
the  whole  moral  and  social  life.  There  is  a  deeper  meaning  in 
Ruskin's  statements  :  "  There  is  no  wealth  but  life,"  and  "Nor 
can  any  noble  thing  be  wealth  except  to  a  noble  person."  The 
economist  in  studying  wealth  must  continually  bear  in  mind 
those  forces  which  make  civilized  human  beings ;  for,  after  all, 
it  is  not  the  wealth  itself,  but  the  human  beings  who  create 
and  who  use  the  wealth,  that  are  of  fundamental  importance. 
What  a  man  does  with  his  wealth  is  a  vital  question ;  for  upon 
the  answer  given  to  this  question  by  society  as  a  whole  depends 
the  growth  of  future  wealth  itself. 

This  is  equivalent  to  saying  that  civilization  consists  in  the 
attempt  to  multiply  wealth,  and  to  render  man  more  amenable 


§  6]  Measure  of  Wealth.  1 5 

to  those  higher  forces  which  will  lead  him  to  employ  his  wealth 
in  the  true  interests  of  progress^/  The  goal  of  all  economic 
development  is  to  make  wealth  abundant  and  to  make  man 
more  able  to  use  wealth  correctly.  'The  real  object  of  eco- 
nomics is  to  explain  the  process  of  making  wealth  cheap,  and 
man  dear.  Education,  science,  art,  ethics,  —  all  have  an  eco- 
nomic side. 

6.  The  Measure  of  Wealth  —  Income  and  Capital. 

Americans  speak  of  a  man  as  worth  a  million  dollars; 
Englishmen  would  call  an  equally  wealthy  man  at  home  worth 
ten  thousand  pounds  a  year.  In  the  United  States,  land  is 
assessed  for  taxation  at  what  it  will  sell  for ;  in  England,  at 
what  it  will  rent  for.  In  the  one  case  we  estimate  wealth  by 
the  capital  value  of  property,  in  the  other  by  the  income  value. 
Capital  and  income  are  thus  here  two  phases  of  the  same  thing. 
Historically  the  reason  is  simple.  In  the  middle  ages  land 
was  the  chief  form  of  wealth,  but  was  rarely  bought  or  sold. 
Under  the  feudal  system  land  had  no  selling  value,  but  only  a 
rental  or  income  value.  A  man  was  rich  when  he  had  a  large 
rent  roll.  The  custom  of  measuring  wealth  by  periodical 
income  finally  spread  to  all  classes  of  society,  because  of  the 
predominant  influence  of  the  landed  interest.  In  the  American 
colonies,  on  the  other  hand,  land  was  abundant  and  free  from 
feudal  restrictions ;  it  was,  therefore,  almost  from  the  begin- 
ning bought  and  sold  like  other  commodities  which  exchanged 
hands  for  definite  sums.  Thus  the  selling  or  capital  value 
came  to  be  the  measure  of  wealth  in  general.  Income  and 
capital  are  therefore  two  aspects  of  wealth.  In  the  one  case 
we  measure  wealth  as  a  flow  of  services  or  stream  of  satisfac- 
tions ;  in  the  other  case  as  a  stock  of  services  or  fund  of 
satisfactions. 

The  income  measurement  of  wealth  is  the  more  fundamental 
psychologically  as  well  as  historically.  We  desire  things  at 
bottom  because  of  their  utility.  They  can  impart  this  utility 
only  in  the  shape  of  a  succession  of  pleasurable  sensations. 


]6  Fundamental  Concepts.  [§  6 

These  sensations  are  our  true  income.  Income,  in  the  eco- 
nomic sense,  is  the  inflow  of  satisfactions  from  economic  goods. 
When  water  is  free  to  all,  the  pleasure  of  drinking  it  does  not 
constitute  an  income,  just  as  little  as  basking  in  the  sun,  which 
shines  on  rich  and  poor  alike,  is  income.  When  water,  how- 
ever, becomes  so  scarce  that  it  acquires  a  value,  its  use  affords 
in  the  broadest  sense  an  income. 

The  original  conception  of  income  is  therefore  pleasure  or 
benefit  income.  In  modern  times  value  has  come  to  be  esti- 
mated in  terms  of  money,  and  income  is  accordingly  used  in 
general  to  denote  the  inflow  or  revenue  in  money,  —  the  money 
income  as  opposed  to  the  pleasure  or  benefit  income.  If  I 
rent  my  yacht  to  another,  the  return  is  called  income,  because 
the  benefit  comes  in  in  the  shape  of -money ;  if  I  use  the  yacht 
myself,  the  return  in  the  form  of  satisfaction  is  not  ordinarily 
called  income.  Yet  they  are  essentially  analogous  phenomena  ; 
for  no  one  would  pay  a  sum  of  money  for  anything  unless  it 
afforded  him  an  equivalent  amount  of  satisfaction.  Just  as 
concrete  articles  of  wealth  existed  before  there  was  any  ex- 
change, so  income  existed  before  there  was  any  money.  Amid 
a  society  based  on  money  transactions,  however,  income  de- 
notes any  inflow  of  satisfactions  which  can  be  parted  with  for 
money.  It  may  not  be  money  income,  but  it  must  be  capable 
of  being  transmuted  into  money  income. 

As  against  the  income,  which  is  at  bottom  the  service  or 
satisfaction  afforded  by  anything  that  has  value,  is  to  be  put 
capital.  When  we  buy  anything  we  buy  the  right  of  securing 
such  a  satisfaction  or  stream  of  satisfactions,  either  from 
repeated  services  as  such,  or  from  the  commodity  which 
embodies  such  services.  Every  commodity  is  a  store  of 
such  satisfactions.  A  suit  furnishes  a  satisfaction  or  income 
every  time  it  is  worn,  an  axe  affords  an  income  every  time  it 
is  used.  We  may  therefore  either  pay  for  each  service  as  it  is 
rendered  or  give  a  lump  sum,  which  capitalizes  this  anticipated 
income  or  flow  of  satisfactions.  One  may  rent  the  dress-suit 
every  night  or  buy  it  outright.  The  process  of  valuation 


§  6]  Income  and  Capital.  17 

through  which  we  assign  a  capital  value  to  this  complex  of 
future  income  values  and  through  which  we  transmute  the  flow 
of  satisfactions  into  a  fund  is  a  subtle  one,  to  be  discussed  later. 
The  process  is  taking  place  about  us  every  moment.  Nothing 
would  have  any  capital  value  if  it  had  no  income  value ;  capi- 
tal is  capitalized  income. 

This  view  of  capital  has  not  always  been  recognized.  The 
earliest  use,  indeed,  of  the  word  capitals  at  the  close  of  the 
middle  ages  was  to  designate  the  caputy  or  principal  sum  of 
money  from  which  a  revenue  was  expected.  Yet  it  has  become 
customary  among  economists  since  Adam  Smith  not  only  to 
confine  the  term  capital  to  wealth  used  for  further  production, 
in  contradistinction  to  wealth  devoted  to  immediate  consump- 
tion, but  also  to  differentiate  capital  from  land.  (Capital 
would  then  be  defined  as  that  part  of  wealth  which  is  the 
result  of  production  devoted  to  further  production.  The 
consequence  has  been  that  capital  has  often  been  regarded  as 
consisting  chiefly  of  the  tools,  machinery,  factories,  ships,  cars 
and  finished  products  of  all  kinds  used  to  increase  production. 

This  is,  however,  at  variance  with  business  usage.  When  a 
wagon  builder,  for  instance,  counts  his  capital,  he  always 
includes  his  real  estate.  The  factory  may  indeed  differ  in  such 
important  points  from  the  land  on  which  it  is  built  as  to 
justify  the  erection  of  a  separate  category  for  land,  but  in  one 
sense  they  are  both  classes  of  capital.  Again,  he  includes  in 
his  capital  the  stock  of  finished  goods,  irrespective  of  whether 
the  wagons  are  to  be  used  by  farmers  as  tools  to  garner  the 
crops  or  by  millionaires  for  pleasure.  Finally,  he  includes 
things  that  have  not  been  produced  at  all,  for  instance,  mere 
privileges  or  patent  rights  granted  to  him  by  government.  His 
capital  thus  comprises  things  that  have  never  been  produced, 
as  well  as  things  that  may  never  be  used  for  further  production. 
Capital  in  this  sense  is  simply  wealth  which  yields  or  can 
yield  an  income.  It  includes  everything  that  has  a  capital 
value.  The  wagon  is  capital  to  the  livery- stable  keeper  because 
his  business  income  is  derived  from  renting  its  use  day  by  day 


1 8  Fundamental  Concepts.  [§  6 

to  customers ;  the  wagon  is  capital  to  the  farmer  because  it 
helps  him  to  get  an  income  from  the  crop ;  the  wagon  is 
capital  to  the  millionaire  because  it  embodies  a  series  of 
incomes,  which  he  actually  enjoys 'in  kind  by  riding,  or  which 
he  could  enjoy  in  money  if  he  chose  to  let  it  out  piecemeal  or 
to  sell  it  outright.  If  a  broker  fails,  his  creditors  will  insist  on 
including  in  the  assets  or  capital  not  only  his  stock  exchange 
seat,  which  is  not  the  result  of  any  production,  but  his  real 
estate  holdings  as  well.  Both  have  a  capital  value.  Capital 
as  contrasted  with  income,  therefore,  is  all  wealth  regarded  as 
a  store  or  fund. 

In  every  progressive  society  men  seek  to  enlarge  their  flow 
of  satisfactions.  This  can  normally  be  done  not  only  by 
enhancing  personal  efficiency,  but  primarily  by  increasing  or 
improving  the  items  of  wealth  which  embody  this  flow  of 
income.  Economic  progress  thus  normally  rests  upon  the 
devotion  of  existing  wealth  to  the  further  increase  of  wealth  ; 
and  the  chief  function  of  capital  may  accordingly  without 
great  error  be  declared  to  be  its  productive  use.  But  it  must 
not  be  overlooked  that  the  end  of  production  is  consumption 
and  that  at  bottom  capital  is  capitalized  income. 

While  income  is,  therefore,  the  fundamental  test  of  wealth, 
it  ordinarily  makes  no  difference  whether  we  measure  a  man's 
wealth  by  his  income  or  his  capital.  Sometimes,  however,  a 
difficulty  arises.  A  railway  president  or  trust  manager  with  a 
salary  of  fifty  thousand  dollars  a  year  cannot  well  be  called 
poor.  Yet  a  system  of  taxation  based  on  the  measurement  of 
wealth  by  capital,  as  in  the  case  of  the  property  tax,  would 
exempt  him  completely.  The  capital  estimate  of  wealth  is 
here  clearly  inadequate.  On  the  other  hand,  the  customary 
restriction  of  income  to  money  income  is  also  occasionally 
embarrassing.  When  capital  is  so  used  as  not  to  yield  a 
money  income,  as  in  the  case  of  one's  yacht  or  jewels  or 
private  park,  an  income  tax  would  not  reach  the  owner  at  all. 
The  injustice  would  be  no  less  than  in  the  preceding  case. 
Some  modern  tax  laws  indeed  include  in  taxable  income  the 


§  7]         Wealth,  Money  and  Property.  19 

annual  value  of  a  house  inhabited  by  the  owner.  But  the 
inclusion  of  benefit  income  in  the  case  of  a  house  and  its 
exclusion  in  the  case  of  a  yacht  or  park  are  not  easy  to  justify. 
The  really  safe  measure  of  wealth,  applicable  in  all  cases,  is 
income  in  the  sense  of  pleasure  or  benefit  income. 

7.   Wealth,  Money  and  Property. 

Whether  wealth  be  measured  in  terms  of  capital  or  of  in- 
come, it  is  generally  expressed  in  terms  of  money.  For  wealth 
in  modern  society  is  anything  that  can  be  exchanged,  or  that 
possesses  an  exchange  value,  and  money  is  admittedly  the 
universal  medium  of  exchange.  Hence  wealth  is  sometimes 
identified  with  money. 

It  is  clear,  however,  that  money  is  simply  a  commodity,  and 
forms  only  a  part  of  the  entire  stock  of  wealth.  It  is,  indeed, 
a  most  important  constituent  of  wealth,  but  acquires  this  im- 
portance chiefly  because  it  is  a  representative  of  other  wealth. 
Very  little  of  a  man's  wealth  consists  of  money,  although  it 
can  all  be  converted  into  money.  Money  is  significant  not 
for  itself  but  as  the  universal  purchasing  medium.  In  modern 
society  the  money  needed  to  carry  on  the  daily  business  trans- 
actions is  like  the  lubricating  oil  in  a  machine.  Without  the 
oil  there  would  be  difficulty  in  making  the  machine  work ; 
without  the  money  there  would  be  embarrassment  in  conducting 
business.  But  just  as  too  much  oil  would  be  not  only  useless 
but  harmful,  so  the  existence  in  a  country  of  more  money  than 
is  needed  for  the  actual  transactions  would  represent  a  waste 
of  wealth  which  might  otherwise  be  employed  in  production. 
Money  is  wealth,  but  wealth  is  not  money.  Wealth  is  money's 
worth,  but  wealth  and  money  are  by  no  means  identical. 

Finally,  we  sometimes  confuse  wealth  with  property.  In 
reality  they  are  not  convertible  terms.  Property  is  primarily 
a  legal  conception.  It  denotes  the  exclusive  right  of  owner- 
ship in  a  definite  amount  of  wealth.  A  man's  property  is  what 
is  legally  his  own,  whether  his  own  consists  of  capital  or  of 
income,  of  concrete  goods  or  of  mere  rights.  If  a  man  mort- 


2O  Fundamental  Concepts.  [§  8 

gages  his  farm  for  half  its  value,  his  real  wealth  in  land  is 
reduced  one-half;  but  the  title  to  the  land  is  still  his,  and  in 
most  states,  like  New  York,  he  pays  his  property  tax  on  the 
entire  value.  But  this  was  not  always  so.  Formerly  the  mort- 
gagee or  lender  entered  upon  the  land  and  enjoyed  its  fruits ; 
later,  he  still  owned  the  land  legally,  but  left  the  mortgagor  or 
borrower  in  possession ;  now  the  land  remains  the  property  of 
the  borrower,  subject  only  to  the  lien  of  the  lender.  From 
the  economic  point  of  view  the  wealth  is  divided  between 
them ;  legally  the  land  is  the  property  of  one  party,  as  in 
former  centuries  it  used  to  be  the  property  of  the  other. 
When  a  man  borrows  money  on  mortgage,  he  is  creating  a 
new  form  of  property,  but  not  new  wealth.  There  is  no  more 
land  than  before,  but  there  is  an  additional  property  right  in 
the  shape  of  a  piece  of  paper  or  mortgage  which  represents 
the  title  to  a  certain  income.  So  the  real  estate  and  rolling 
stock  of  a  railroad  constitute  the  property  of  the  corporation, 
while  the  capital  stock  is  the  property  of  the  stockholder. 
They  form  different  kinds  of  property  and  can  be  sold  sepa- 
rately ;  yet  this  duplication  of  property  rights  does  not  increase 
the  amount  of  wealth  in  existence.  Property  is  a  legal  right 
to  wealth ;  it  is  not  in  itself  wealth. 

8.  Public  and  Private  •Wealth. 

While  there  is  in  most  cases  little  difference  whether  we  use 
capital  or  income  as  the  measure  of  private  wealth,  or  the 
wealth  of  the  individual,  the  distinction  becomes  important  in 
the  case  of  public  wealth,  or  the  wealth  of  the  community 
as  a  whole.  To  compute  the  national  wealth,  as  some  cen- 
suses do,  by  adding  to  the  government  property  the  capital  or 
selling  value  of  all  private  property  is  erroneous,  because,  as 
has  just  been  pointed  out,  we  should  be  counting  many  things 
twice.  The  only  true  measure  of  public  wealth  is  income. 

Sometimes  it  is  mistakenly  stated  that  the  test  of  commer- 
cial value  cannot  be  applied  to  public  wealth.  It  is  claimed, 
for  instance,  that  rivers,  climate  and  situation,  which  are  not 


§  8]  Public  and  Private  Wealth.  21 

and  cannot  be  sold,  form  the  essential  constituents  of  public 
wealth.  This  involves  the  same  confusion  that  was  encoun- 
tered in  discussing  the  so-called  personal  wealth  of  an  indi- 
vidual (§4).  Rivers  and  climate  do  not  constitute  wealth. 
They  enable  a  country  to  acquire  wealth,  just  as  intelligence 
or  strength  enables  a  man  to  acquire  wealth.  They  are  the 
source  of  wealth,  but  they  are  not  wealth.  America  under 
the  Indians  had  the  same  rivers  and  climate  as  now,  yet  no 
one  would  speak  of  the  America  of  a  thousand  years  ago  as 
wealthy.  Until  these  natural  advantages  are  converted  into 
actual  results  they  do  not  become  wealth.  When  they  are 
finally  made  to  contribute  to  a  flow  of  income  in  the  shape 
of  finished  products  or  services,  these  products  and  services 
acquire  a  commercial  value  and  constitute  wealth.  The  fun- 
damental test  of  all  wealth  in  modern  times  is  income  in  the 
shape  of  benefits  that  can  be  parted  with,  and  for  which  some- 
thing will  be  given.  Public  wealth,  like  private  wealth,  has  a 
commercial  value,  but  public  wealth  can  be  estimated  only  in 
terms  of  income,  not  of  capital. 

The  destruction  of  private  wealth  can  never  of  itself  increase 
public  wealth,  but  the  destruction  of  some  forms  of  private 
wealth  may  bring  about  a  far  greater  increase  in  other  forms 
of  private  wealth  and  thus  augment  the  public  wealth.  The 
abolition  of  slavery  annihilated  the  wealth  of  the  slaveholder ; 
but  it  created  the  property  of  the  former  slave  in  himself,  and 
led  to  such  an  increase  of  productive  power  that  the  total  out- 
put of  society  was  greater  than  before.  The  property  of  a 
gas  company  may  be  rendered  valueless  by  the  discovery  of 
a  natural  gas  field  owned  by  the  community,  as  in  Toledo. 
Yet  the  destruction  of  the  private  wealth  of  the  shareholders 
is  far  more  than  offset  by  the  fact  that  each  consumer  of  gas  can 
now  devote  to  productive  purposes  the  sums  hitherto  necessary 
to  pay  the  gas  bills.  We  say,  far  more  than  offset,  because  the 
wealth  of  the  shareholders  was  a  capitalization  of  profits,  while 
the  wealth  of  the  gas  consumers  is  now  increased  by  a  sum 
equal  to  the  total  price  of  the  gas,  including  both  cost  and 


22  Fundamental  Concepts.  [§  8 

profits.  There  is,  in  short,  an  addition  to  the  net  income  of 
society,  and  therefore  an  increase  of  public  wealth. 

Again,  whether  the  annihilation  of  private  wealth  through  a 
change  from  private  to  public  ownership  creates  public  wealth 
or  not  depends  entirely  on  the  success  of  the  undertaking.  If 
a  government  railway  can  be  operated  either  more  cheaply  or 
with  lower  or  more  equal  charges  than  a  private  railway,  there 
will  be  an  increase  of  public  wealth.  The  test  in  every  case  is 
the  flow  of  income  to  the  individuals  that  constitute  society ; 
but  this  flow  under  modern  conditions  always  has  a  commercial 
value. 

Since  income  is  the  only  adequate  test  of  public  wealth,  we 
can  speak  of  a  wealthy  country  in  two  senses.  If  we  think  of 
the  aggregate  income,  a  large  country  will  be  called  wealthier 
than  a  small  one  ;  if  we  think  of  the  average  per  capita  income, 
a  small  country,  like  Belgium,  would  be  wealthier  than  a  large 
one  like  Russia.  Inasmuch  as  the  real  object  of  our  study  is 
not  wealth  in  itself,  but  man  in  his  relation  to  wealth,  it  is 
clear  that  the  second  use  of  the  term  is  preferable.  It  is  the 
participation  of  an  individual  in  the  wealth  of  the  community 
that  makes  social  prosperity. 

The  true  scope  of  economics  is  therefore  the  study  of  the 
forces  which  contribute  to  the  growth  of  the  social  income  or 
public  wealth,  and  which  regulate  the  shares  of  classes  and 
individuals  in  this  flow  of  wealth. 


CHAPTER    II. 
ECONOMIC   LAW   AND   METHOD. 

9.  References. 

L.  Cossa,  Introduction  to  Political  Ecotiomy  (1893),  Theoret.  Part,  chs. 
iii,  vi;  J.  Keynes,  Scope  and  Method  of  Political  Economy  (3d  ed.,  1904), 
chs.  ii-iv,  vii-viii;  J.  E.  Cairnes,  Character  and  Logical  Method  of  Political 
Economy  (2d  ed.,  1875),  Lects.  3,  4;  A.  Marshall,  Principles  (4th  ed., 
1898),  bk.  i.  chs.  v,  vi ;  N.  G.  Pierson,  Principles  of  Economics  (1902), 
Introd.;  A.  W.  Flux,  Principles  (1904),  ch.  i ;  F.  A.  Walker,  Political 
Economy  (3d  ed.,  1888),  part  i  ;  E.  R.  A.  Seligman,  Economic  Interpreta- 
tion of  History  (1902),  part  2,  ch.  iii;  W.  J.  Ashley,  Surveys  (1900), 
Preliminaries;  A.  C.  Bowley,  Statistics  (1901),  ch.  i;  R.  Mayo-Smith, 
Statistics  and  Economics  (1899),  ch.  i;  H.  Sidgwick,  Scope  and  Method 
of  Economic  Science  (1886),  and  in  Miscellaneous  Essays  and  Addresses 
(1904)  ;  G.  C.  Lewis,  On  the  Methods  of  Observation  and  Reasoning  in 
Politics  (1852),  ch.  iii;  A.  Wagner,  On  the  Present  State  of  Political 
Economy  (Quart.  Jour.  Econ.,  I,  1886) ;  E.  A.  Ross,  The  Foundations 
of  Sociology  (1905),  chs.  i,  ii. 

ON  THE  MATHEMATICAL  METHOD.  W.  S.  Jevons,  Theory  of  Politi- 
cal Economy  (2d  ed.,  1879),  Preface;  F.  Y.  Edgeworth,  (i)  Mathe- 
matical Psychics  (1881);  (2)  On  the  Application  of  Mathematics  to 
Political  Economy  (Jour.  Stat.  Soc.,  LII,  1889)  '>  (3)  On  the  Representa- 
tion of  Statistics  by  Mathematical  Formula  (Ibid,,  LXI-LXII,  1898- 
1899)  '•>  !•  Fisher,  Mathematical  Investigations  in  the  Theory  of  Value 
and  Prices  in  Conn.  Acad.,  Transactions,  IX  (1892) ;  C.  Cunynghame, 
A  Geometrical  Political  Economy  (1904). 

10.  Meaning  of  Economic  Law. 

It  is  sometimes  questioned  whether  there  are  such  things  as 
economic  laws.  The  problem  has  often  been  complicated  by 
the  failure  to  distinguish  between  the  various  meanings  of  the 
term  law.  (i)  Law  may  denote  a  body  of  customary  usages, 
as  the  common  law,  or  primitive  law.  (2)  Law  may  mean  a 

23 


24  Economic  Law  and  Method.         [§  10 

statutory  enactment,  as  a  law  of  Congress.  (3)  Law  may  sig- 
nify a  rule  of  action  or  a  precept,  as  a  moral  law.  (4)  Law 
may  mean  the  statement  of  relations  of  cause  and  effect 
between  phenomena,  as  a  law  of  physics.  When  we  speak  of 
economic  law,  we  properly  use  the  word  in  the  last  sense. 
Everything  that  happens  in  the  universe  is  related  either  as 
cause  or  as  effect  to  some  other  thing.  It  is  the  function  of 
science  to  ascertain  this  relation,  and  to  formulate  the  law 
which  explains  the  relation.  In  this  sense  every  scientific 
law  is  a  natural  law,  because  it  deals  with  the  phenomena  of 
nature,  because  it  explains  the  natural  or  necessary  relations 
between  things.  A  scientific  law  states  that  definite  causes 
necessarily  lead  to  definite  results. 

Since  economics  is  the  science  of  industrial  relations,  an 
economic  law  is  a  natural  law  so  far  as  it  interprets  the  rela- 
tions of  human  nature  to  industrial  facts.  Everything  that 
occurs  in  economic  life  takes  place  in  accordance  with  some 
law ;  it  is  the  function  of  the  economist  to  ascertain  this  law. 
Only  in  this  sense  can  we  speak  of  an  immutable  economic 
law.  An  economic  law  does  not  mean  a  precept  or  rule  of 
action ;  there  is  nothing  immutable  about  a  rule  of  action. 
To  speak  of  a  law  of  free  trade,  for  instance,  is  unmeaning. 
An  economic  law  affirms  that  if  certain  causes  exist,  certain 
results  are  sure  to  follow.  The  facts  themselves,  whether  of 
human  nature  or  of  the  outward  world,  may  differ ;  but  given 
definite  facts,  definite  consequences  will  ensue.  The  relation 
between  these  facts  is  capable  of  being  expressed  in  a  state- 
ment of  cause  and  effect,  which  we  call  a  scientific  law. 

It  must  not  be  overlooked,  however,  that  economic  laws 
are  essentially  hypothetical.  We  must  be  quite  sure  that  the 
premises  are  true  to  actual  life  before  we  can  draw  a  conclusion 
applicable  to  existing  facts.  So  far  as  the  premises  are  only 
partially  true,  the  conclusions  are  only  partly  valid.  This  does 
indeed  not  prove  that  there  are  no  economic  laws,  but  only 
that  the  law  may  not  yet  have  been  ascertained,  or  that  the 
particular  statement  of  the  law  in  question  is  only  provisional. 


§  IQ]  Economic  Law.  25 

In  this  respect  economic  law  does  not  differ  from  any  other 
scientific  law. 

In  one  point,  however,  the  laws  of  all  the  social  sciences  do 
differ  from  those  of  natural  science.  The  social  sciences  deal 
with  man,  and  man  is  himself  a  continually  changing  factor. 
Man  is  a  product  of  history ;  economic  institutions,  like  all 
other  social  facts,  have  their  roots  in  the  past.  What  is,  is  the 
outcome  of  what  has  been.  With  every  mutation  in  outward 
conditions  and  social  relations  there  comes  a  change  in  the 
economic  facts  or  in  the  methods  devised  to  secure  adaptation 
of  means  to  end.  Nothing  is  so  rare  as  the  historical  per- 
spective ;  nothing  so  difficult  to  realize  as  the  relativity  of 
existing  institutions.  At  one  stage  of  scientific  inquiry,  for 
instance,  it  was  assumed  that  private  property  was  a  natural 
phenomenon,  an  outcome  of  the  very  nature  of  man.  It  is 
now  seen  that  private  property  is  not  an  absolute,  but  an  his- 
torical category  ;  that  the  conception  itself  was  of  slow  growth, 
and  that  its  content  varies  from  age  to  age.  What  is  true  of 
private  property  is  true  of  almost  every  other  economic  institu- 
tion. It  has  grown  to  be  what  it  is ;  it  has  once  been  differ- 
ent, and  will  again  be  different.  While  there  is  life,  there  will 
be  change. 

In  outward  nature,  on  the  other  hand,  we  operate  with 
forces  that  are  in  one  sense  unchanging.  For  instance,  in  dis- 
cussing physical  or  astronomical  facts  we  are  justified  in  taking 
for  granted  the  existence  of  gravitation.  In  discussing  econo- 
mic facts,  however,  it  would  not  be  safe  to  assume  in  every 
case  the  existence,  in  unimpaired  activity,  of  the  motive  of  self- 
interest.  Not  only  may  there  be  counteracting  forces  —  for 
that  is  true  also  of  physics  —  but  the  motive  itself  may  suffer  a 
change.  We  cannot  appeal  to  the  natural  law  of  self-interest 
in  the  same  sense  that  we  speak  of  the  natural  law  of  gravita- 
tion. The  one  is  dependent  on  man,  the  other  is  independent 
of  man.  In  this  sense  there  are  no  "  natural  "  laws  in  social 
science.  The  frequent  appeal  in  current  discussion  to  the 
natural  laws  of  society  as  something  apart  from  man,  and  over 


26  Economic  Law  and  Method.         [§  10 

which  he  has  no  control,  is  erroneous.  There  are  no  natural 
laws  in  the  sense  that  man  himself  is  powerless  to  alter  the 
conditions  which  form  the  basis  of  the  statement. 

The  French  school  of  Physiocrats  in  the  eighteenth  century 
first  applied  to  economics  the  conception  of  natural  law  as  a 
part  of  the  order  of  nature,  from  the  overwhelming  necessity 
of  which  no  one  could  escape.  John  Stuart  Mill,  although  he 
still  held  fast  to  the  old  conception  of  natural  law  as  applied 
to  production,  pointed  out  that  the  laws  of  distribution  were 
themselves  capable  of  being  modified  by  human  agency. 
Modern  science  has  shown  that  what  is  true  of  distribution  is 
equally  true  of  production,  and  that  there  is  no  natural  law  as 
a  part  of  a  natural  order  in  any  field  of  economic  inquiry. 
The  old  conception  of  natural  law  has  been  abandoned  in 
economics,  as  it  has  been  given  up  in  politics  and  jurispru- 
dence. In  its  stead  has  been  put  the  more  modern  idea  of 
natural  law,  in  the  sense  of  scientific  law.  Modern  natural 
law  is  essentially  hypothetical  in  character  and  carries  with  it 
no  moral  implication. 

We  must  be  careful,  then,  not  to  confuse  the  two  concep- 
tions. An  economic  law  is  a  natural  law  so  far  as  it  states  that 
given  conditions  will  lead  to  given  results.  An  economic  law 
is  not  a  natural  law  so  far  as  it  implies  that  human  effort  is 
impotent  to  modify  the  conditions  which  lead  to  the  results. 

It  was  as  a  protest  against  the  natural  law  of  the  old  econo- 
mists that  the  term  historical  law  was  introduced.  Some  of  the 
newer  writers  urged  that  the  essential  point  was  to  study  the 
evolution  of  economic  law  itself  as  embodied  in  the  changes 
of  economic  life.  To  them  the  only  economic  laws  were  the 
historical  laws  which  throw  light  upon  the  growth  of  society 
and  trace  the  development  of  economic  relations.  This, 
however,  also  involved  an  exaggeration,  in  that  it  put  more 
emphasis  on  the  past  than  on  the  present,  and  often  failed  to 
afford  an  adequate  analysis  of  existing  facts.  This  particular 
controversy  has  now  fortunately  been  laid  to  rest. 

Another  objection  to  the  idea  of  economic  law  may  be  men- 


§  n]  Economic  Investigation.  27 

tioned.  We  frequently  hear  it  said  that  something  is  true  in 
theory  but  not  in  practice.  The  fallacy  of  this  statement  is 
evident  when  we  reflect  that  a  theory  is  nothing  but  the  formu- 
lation of  a  law,  a  statement  of  the  necessary  relations  between 
facts.  If  a  thing  is  true  in  theory,  it  must  be  true  in  practice. 
The  difficulty  is  to  formulate  the  correct  theory.  When  people 
say  it  is  easy  to  "  theorize,"  they  mean  that  it  is  easy  to  frame 
an  alleged  theory.  Nothing  is  harder  than  to  construct  a  true 
theory.  For  a  true  theory  must  fit  into  every  fact ;  otherwise 
it  is  not  the  correct  theory.  The  hasty  and  untrue  generaliza- 
tions of  those  that  set  themselves  up  as  "  theorists  "  are  really 
responsible  for  the  seeming  antagonism.  There  can  be  as  little 
divergence  between  true  economic  theory  and  actual  economic 
life  as  between  the  theory  of  chemistry  and  chemical  phe- 
nomena. It  is  the  theory  which  must  be  made  to  fit  the  facts, 
and  not  the  facts  which  must  be  twisted  to  suit  the  theory. 

11.  Methods  of  Economic  Investigation. 

With  the  broader  conception  of  economic  relations,  the  old 
contest  over  method  has  been  relegated  to  the  background. 
It  was  formerly  much  discussed  whether  economics  was  a  de- 
ductive or  an  inductive  science ;  whether,  in  other  words,  we 
should  start  out  from  certain  general  principles,  or  attempt 
to  reach  these  principles  through  the  interrogation  of  facts. 
Sometimes  the  contrast  between  them  was  expressed  by  the 
term  abstract  or  analytical,  as  opposed  to  the  concrete  or  his- 
torical or  comparative  method. 

There  is  at  present  a  substantial  agreement  among  econo- 
mists that  both  methods  are  correct,  and  that  it  would  be  a 
mistake  to  assert  the  predominance  of  either.  It  is  a  ques- 
tion not  of  economics  in  general,  but  of  the  particular  prob- 
lems to  be  solved.  In  some  the  one  method  is  more  fruitful, 
in  some  the  other.  In  such  a  problem  as  the  incidence  of 
taxation  the  historical  or  inductive  method  would  be  of  little 
avail,  because  of  the  difficulty  of  disentangling  the  fundamental 
cause  from  among  the  complicated  facts  of  actual  life.  In 


28  Economic  Law  and  Method.         [§  12 

such  a  problem  as  the  variation  between  piece  wages  and  time 
wages  the  deductive  or  abstract  method  would  probably  not 
bring  us  to  our  goal  so  quickly.  Each  method  has  its  advan- 
tages and  its  limitations.  In  the  deductive  method  we  can  be 
sure  of  our  conclusions  only  after  checking  them  by  the  facts; 
in  the  inductive  method  we  cannot  formulate  the  law  until  we 
find  that  it  is  in  harmony  with  well-established  principles. 
In  the  one  case  we  start  from  the  principle  and  reach  the 
facts ;  in  the  other  we  start  from  the  facts  and  attain  the  prin- 
ciple. Neither  can  be  successfully  divorced  from  the  other. 
In  most  cases  of  reasoning,  indeed,  we  use,  consciously  or 
unconsciously,  each  method  in  turn. 

Each  method,  again,  when  pushed  to  an  extreme  is  either 
dangerous  or  barren.  The  earlier  advocates  of  the  abstract 
or  analytical  school  sometimes  framed  their  generalizations 
hastily,  and,  through  their  failure  to  make  allowance  for  the 
numberless  counteracting  tendencies,  often  gave  an  appearance 
of  unreality  to  their  conclusions.  Such,  for  example,  was  the 
celebrated  wages-fund  theory  (§  174).  The  more  ardent  fol- 
lowers of  the  concrete  or  historical  school  have  sometimes  ex- 
aggerated the  difficulty  of  reaching  general  laws  at  all,  and 
have  left  us  to  wander  aimlessly  in  the  forest  of  facts,  putting 
off  to  an  ever-distant  day  their  analysis  and  utilization.  On  the 
other  hand,  the  more  moderate  advocates  of  each  method  have 
accomplished  a  real  advance.  The  historical  school  has  shown 
that  we  can  really  understand  what  is  only  through  a  com- 
prehension of  what  has  been,  and  that  the  problems  of  funda- 
mental importance  to  social  well-being  are  those  of  change. 
The  analytical  school  has  shown  that  the  particular  is  of 
value  only  as  illustrating  the  general,  and  that  no  true  progress 
in  economic  reasoning  can  take  place  until  we  frankly  recog- 
nize the  need  and  the  existence  of  general  principles. 

12.  Relation  of  Economics  to  Other  Sciences. 

In  the  modern  hierarchy  of  thought  the  points  of  contact 
between  the  various  sciences  are  continually  becoming  more 


§  12]  Relation  to  Other  Sciences.  29 

numerous.  We  recognize  the  possibility  of  regarding  facts 
from  different  points  of  view.  With  increasing  differentiation, 
on  the  other  hand,  there  also  comes  the  recognition  of  in- 
creasing unity. 

With  some  sciences  the  points  of  contact  have  been  empha- 
sized only  in  recent  years,  —  as,  for  instance,  with  psychology 
and  biology.  The  economist  whose  chief  concern  is  with  the 
law  of  value  necessarily  operates  with  the  data  of  psychology. 
Value  can  have  no  existence  apart  from  the  mental  conditions 
of  man.  The  whole  conception  of  demand  is  essentially  psycho- 
logical. While,  however,  the  connection  between  psychology 
and  economics  is  real  and  intimate,  it  may  be  doubted  whether 
the  psychological  treatment  of  economic  relations  can  carry  us 
much  further  than  to  the  comprehension  of  the  elementary 
principles  of  valuation.  In  the  same  way,  it  was  at  one  time 
the  fashion  to  apply  biological  concepts  to  economic  life,  and 
to  speak  of  the  economic  organism,  the  economic  structure 
and  the  economic  functions.  It  is,  however,  coming  more  and 
more  to  be  recognized  that  these  are  vague  analogies  rather  than 
identities ;  that  the  laws  of  life  in  the  economic  world  are  not 
the  same  as  those  in  the  physical  world ;  and  that  the  only 
real  aid  which  biology  can  give  to  economics  is  to  enforce  the 
conviction  that  in  social  as  in  animal  life  there  is  continual 
growth  and  perpetual  change. 

With  another  class  of  sciences,  mathematics  and  statistics, 
the  relation  is  more  intimate,  but  primarily  from  the  point  of 
view  of  method.  Economics  deals  in  one  sense  with  quanti- 
tative relations.  Market  values  are  expressed  in  figures  j  and 
mathematics"  is  of  undoubted  aid  in  enabling  us  to  make  a 
short  cut,  as  it  were,  through  the  mazes  of  figures.  Both 
algebra  and  geometry  have  frequently  been  employed  with 
success ;  and  it  is  remarkable  that  some  of  the  greatest  steps 
in  advance  in  the  pure  theory  of  economics  have  been  taken 
by  those  who,  like  Cournot  or  Gossen  or  Jevons  or  Marshall, 
approached  the  subject  from  the  mathematical  side.  The 
advocates  of  the  mathematical  method,  however,  are  apt  to 


30  Economic  Law  and  Method.         [§  13 

overshoot  the  mark.  They  often  forget  that  the  range  of  ques- 
tions with  which  they  can  deal  is  essentially  limited,  because  so- 
cial processes  cannot  readily  be  reduced  to  exact  quantitative 
form.  They  do  not  always  remember  that  the  variables  with 
which  they  operate  are  often  precisely  the  important  factors  in 
social  life ;  and  that  human  aspirations  and  human  needs  can- 
not be  pent  up  within  the  confines  of  a  mathematical  formula, 
no  matter  how  broad  it  may  appear.  Within  a  narrow  field 
the  mathematical  method  can  be  used  to  great  advantage,  but 
it  will  always  be  of  more  use  to  the  writer  than  to  the  reader. 

In  the  case  of  statistics  the  danger  is  of  the  opposite  kind. 
In  mathematics  the  difficulty  is  to  get  a  law  which  will  not  be 
so  all-embracing  as  to  be  inapplicable  to  real  life.  In  statis- 
tics, even  granted  that  we  have  collected  the  true  figures,  the 
difficulty  consists  in  distilling  from  them  any  general  principle 
of  lasting  value.  In  the  first  case  we  run  the  risk  of  formu- 
lating unrealities ;  in  the  second  of  stating  platitudes.  What 
was  said  in  a  preceding  section  of  the  abstract  and  the  con- 
crete methods  of  investigation  applies  with  augmented  force 
here.  The  mathematical  method  is  the  abstract  method 
pushed  to  an  extreme ;  the  statistical  method  is  the  concrete 
method  pushed  to  a  like  extreme.  Statistics  form  an  indis- 
pensable adjunct  to  economic  inquiry,  but  they  are  of  value 
principally  for  purposes  of  illustration  rather  than  of  construc- 
tion. They  show  us  that  there  is  a  reign  of  law  in  the  moral  as 
well  as  in  the  physical  world ;  they  do  not  always  enable  us  to 
ascertain  the  law. 

13.  Relation  of  Economics  to  Politics  and  Other  Moral 
Sciences. 

When,  however,  we  come  to  the  moral  sciences,  of  which 
economics  itself  is  one,  we  notice  a  more  intimate  relation. 
These  are  politics,  jurisprudence  and  ethics. 

(i)  The  study  of  politics  or  the  science  of  the  state  has 
gone  through  several  stages.  For  a  long  time  history  was 
dominated  by  the  "  great  man  "  theory  of  politics ;  attention 


§  1 3]  Relation  to  Politics.  31 

was  centred  chiefly  in  the  kings  and  the  battles,  the  court 
intrigues  and  military  problems.  At  a  later  period  more  em- 
phasis was  put  on  the  development  of  institutions  compared 
with  which  any  individual,  however  eminent,  was  insignificant. 
Finally,  it  was  recognized  that  political  life  itself  is  closely  in- 
tertwined with  the  economic  life,  and  that  the  forms  as  well  as 
the  practices  of  government  are  profoundly  influenced  by  the 
conditions  of  production  as  well  as  by  those  of  distribution. 
Economic  facts  would  then  be  the  cause  ;  political  phenomena 
the  result. 

On  the  other  hand,  since  all  modern  economic  action  is 
carried  on  within  the  framework  of  the  state,  when  we  deal 
with  any  practical  economic  institution  no  final  solution  of  the 
problem  can  be  reached  until  the  effect  of  the  political  condi- 
tions be  weighed.  In  discussing  the  economic  consequences  of 
government  ownership,  for  instance,  the  status  of  the  govern- 
mental civil  service  is  a  potent  consideration.  Political  facts 
may  profoundly  modify  the  economic  conditions,  instead  of 
being  modified  by  them.  While,  therefore,  politics  deals  with 
the  relation  of  the  individual  to  the  government,  and  eco- 
nomics with  one  aspect  of  the  relations  of  individuals  to  each 
other,  there  is  almost  always  a  distinct  interaction  between  the 
two.  It  is  a  necessity  for  the  publicist  to  comprehend  the 
economic  basis  of  political  evolution ;  it  is  the  business  of 
the  economist  to  remember  the  political  conditions  which 
affect  economic  phenomena. 

(2)  What  has  been  said  of  politics  applies  with  still  greater 
force  to  jurisprudence.  All  systems  of  law  are  in  the  main  the 
crystallization  of  long-continued  social  usage.  Social  customs 
are  coeval  with  the  origin  and  growth  of  society  itself;  the 
mandatory  force  of  the  positive  law  comes  at  a  later  stage  in 
the  evolution.  The  unwritten  gradually  turns  into  the  written 
law,  until  the  positive  enactment  is  invented  with  the  sanction 
of  a  sovereign  command.  As  society  develops,  the  law  is  in 
a  perpetual  process  of  change.  No  code  is  final ;  it  always 
represents  a  given  stage  of  social  life.  The  law  is  the  outward 


32  Economic  Law  and  Method.         [§  13 

manifestation ;  the  social,  and  especially  the  economic,  fact  is 
the  living  force.  The  formal  juristic  conception  may  remain 
the  same ;  its  content  must  be  modified  by  every  change  of 
economic  life.  Legal  history  is  really  a  handmaid  to  economic 
history ;  legal  development  is  inexplicable  apart  from  economic 
forces.  The  economic  fact  in  this  sense  is  the  cause  ;  the  legal 
situation  is  the  result. 

At  any  given  moment,  however,  economic  phenomena  take 
place  within  a  legal  framework.  The  elemental  forces  of  eco- 
nomic life  cannot  indeed  in  the  long  run  be  conditioned 
by  legal  forms ;  but  the  law  may  for  a  time  hold  in  check,  or 
give  a  new  direction  to,  economic  forces.  Take  as  an  example 
the  English  law  of  primogeniture  and  of  entailed  estates  as 
compared  with  the  French  laws  which  have  led  to  the  system 
of  small  farms.  History  is  full  of  instances  where  the  law  has 
for  good  or  for  evil  affected  the  economic  environment.  Just 
because  the  economic  life,  however,  is  prior  to  the  legal  system, 
there  is  always,  at  any  given  moment,  the  danger  of  a  lack  of 
harmony  between  the  two.  It  is  in  the  interval  between  the 
economic  changes  and  the  readjustment  of  the  legal  facts  that 
the  influence  of  law  upon  economics  is  keenly  felt.  Life  indeed 
consists  of  a  perpetual  adaptation  of  outward  forms  to  inner 
forces,  and  thus  the  economic  basis  of  a  legal  system  is  really 
the  important  fact  to  the  social  philosopher.  In  practical  life, 
however,  we  deal  with  outward  forms,  and  thus  the  legal  shape 
of  the  economic  relations  must  never  be  lost  from  sight.  In 
economics  and  jurisprudence  there  is  continual  action  and 
reaction. 

(3)  Close  as  are  the  relations  of  economics  with  both  poli- 
tics and  jurisprudence,  the  connection  between  economics  and 
ethics  is  closer  still.  This  has  often  been  denied.  In  the 
popular  mind  there  is  even  an  idea  that  there  is  a  real  conflict 
between  them.  In  truth,  this  seeming  conflict  can  be  traced 
back  at  least  as  far  as  Adam  Smith ;  for  he  based  his  system 
of  political  economy  on  the  principle  of  self-interest,  his  system 
of  ethics  on  the  principle  of  sympathy.  Thus  there  grew  up 


§  13]  Relation  to  Politics.  33 

the  idea  that  the  two  leading  motives  of  human  action  are  the 
purse  and  the  conscience ;  that  the  economic  man  is  repre- 
sented by  the  one  and  the  ethical  man  by  the  other;  that 
there  is  a  hopeless  conflict  between  them ;  and  that  economics 
and  ethics  have  nothing  to  do  with  each  other. 

The  modern  view,  however,  is  different.  Ethics,  like  juris- 
prudence and  politics,  is  now  recognized  as  essentially  social 
in  its  origin.  All  individual  ethics  are  seen  to  be  the  outgrowth 
of  social  ethics.  The  very  conception  of  right  and  wrong  was 
originally  a  social  conception,  afterwards  transferred  to  the 
individual.  Since  man  lives  in  society,  whatever  was  recog- 
nized as  making  for  the  general  good  came  to  be  regarded 
as  the  test  of  morality.  For  individuals  to  persist  in  doing 
what  was  not  for  the  social  benefit  must  finally  have  ended  in 
the  destruction  of  society,  and  therefore  of  the  individual  him- 
self as  a  member  of  society.  Social,  not  individual,  utility 
therefore  unconsciously  became  the  criterion.  When  we  say 
honesty  is  the  best  policy,  we  do  not  mean  that  it  is  always 
expedient  for  the  particular  individual  to  be  honest,  for  we 
unfortunately  know  of  cases  to  the  contrary.  What  we  mean 
is  that  honesty  is  the  best  policy  for  society,  and  therefore  has 
become  right  for  the  individual  as  well.  Ages  upon  ages  of 
this  experience  have  converted  this  and  similar  conclusions 
into  a  human  instinct,  and  have  thus  made  us  realize  the 
existence  of  the  categorical  imperative  as  the  sovereign  moral 
law.  The  whole  ethical  progress  of  man  consists  in  conform- 
ing his  actions  to  the  ideal  social  welfare. 
{  There  can  therefore  be  no  conflict  between  correct  economic 
action  and  true  ethical  theory.  Adam  Smith's  principles  are 
indeed  true,  but  they  are  complementary,  not  antagonistic. 
Sympathy  or  altruism  pushed  to  an  extreme  involves  the 
destruction  of  self  and  therefore  the  death  of  society;  self- 
interest  or  egoism  pushed  to  an  extreme  means  the  destruc- 
tion of  others  and  therefore  likewise  the  death  of  society. 
Social  life  can  endure  only  through  a  balancing  of  these  two 
principles,  each  reinforced  by  the  other.  (Since  economics, 


34  Economic  Law  and  Method.         [§  14 

like  ethics,  is  primarily  a  social  science,  the  true  economic 
action  must  in  the  long  run  be  an  ethical  action.  An  indi- 
vidual may  pursue  selfish  economic  ends,  and  may  augment 
his  own  wealth  at  the  cost  of  moral:  progress ;  but  he  is  then 
subordinating  public  to  private  considerations.  Broadly  speak- 
ing, and  regarded  from  the  point  of  view  of  society  as  a  whole, 
what  is  economically  advantageous  must  in  the  long  run  be 
right ;  and  what  is  correct  in  ethics  must  in  the  end  also  be 
profitable  to  the  business  world.  The  modern  economist  there- 
fore has  become  just  as  mindful  of  the  ethical  aspects  of  every 
economic  problem  as  the  modern  moralist  has  been  forced  to 
recognize  the  economic  side  of  his  ethical  problem. 

14,   Scope  of  Economics. 

From  what  has  been  said  it  will  be  seen  that  the  scope  of 
economics  is  varied.  This  cannot  be  expressed  in  the  old 
way  by  distinguishing  between  pure  economics  and  applied  or 
practical  economics.  (In  the  first  place,  no  such  sharp  line 
can  be  drawn ;  and,  secondly,  even  if  the  two  parts  could  be 
distinguished,  they  would  not  cover  the  whole  field  of  economic 
inquiry. 

The  distinction  between  pure  and  applied  economics  has 
been  much  exaggerated.  If  the  study  of  economic  theory  has 
any  justification  at  all,  it  must  fit  into  the  facts  of  actual  busi- 
ness life.  There  may,  indeed,  be  such  a  thing  as  pure  mathe- 
matics, which  discusses  conclusions  from  premises  which  exist 
only  in  the  mind  of  the  investigator  and  find  no  counterpart  in 
actual  life.  But  if  there  is  such  a  thing  as  pure  economics  in 
this  sense,  it  would  be  of  no  earthly  use  except  as  a  logical 
exercise  or  a  play  of  the  imagination.  Economics  is  the  sci- 
ence of  industrial  relations,  — .not  as  they  might  exist  hypo- 
thetically  in  the  mind  of  the  investigator,  but  as  they  really 
exist.  Economic  law  must  explain  economic  facts;  the  law 
inheres  in  the  facts,  the  facts  are  the  embodiment  and  illus- 
tration of  the  law.  The  attempted  distinction  between  pure 
and  applied  economics  is  a  clumsy  way  of  putting  the  emphasis 


§  14]  Scope  of  Economics.  35 

on  the  two  sides  of  the  same  thing,  —  the  law  in  its  relation  to 
the  facts. 

Sometimes  the  distinction  is  expressed  in  another  way,  as 
when  economic  science  is  opposed  to  economic  art.  This  is 
indeed  a  distinction ;  but  economic  art  does  not  deal  with 
principles  at  all,  it  deals  with  precepts.  Economic  art  is  an 
awkward  expression  for  the  economics  of  statesmanship.  The 
legislator  practises  economic  art;  he  may  or  may  not  study 
economic  principle.  If,  however,  he  runs  counter  to  the 
principle,  he  cannot  succeed  in  the  art. 

In  the  second  place,  the  old  distinction  between  pure  and 
applied  economics  is  untenable,  because  the  discipline,  whether 
in  its  abstract  form  or  in  its  application,  is  made  to  deal  only 
with  actual  conditions.  The  preceding  analysis  has  disclosed 
the  inadequacy  of  this  point  of  view.  Economics  is  to  teach 
us  to  understand  the  principles  of  industrial  life.  Its  chief 
object,  indeed,  is  to  explain  to  us  what  is.  If  all  society,  how- 
ever, is  the  result  of  an  evolution,  we  can  understand  what  is 
only  by  knowing  what  has  been.  Moreover,  if  the  relation 
of  economics  to  ethics  is  such  a  close  one,  it  is  equally  evi- 
dent that  we  can  criticise  the  present  not  only  in  the  light 
of  the  past,  but  in  the  light  of  the  future ;  and  that  a  dis- 
cussion of  social  tendencies  at  once  brings  up  the  question 
of  what  ought  to  be.  Economic  inquiry  is  teleological  as 
well  as  historical. 

In  every  phase  of  our  study,  therefore,  we  must  endeavor  first 
to  ascertain  how  the  particular  relations  have  come  to  be  what 
they  are ;  secondly,  to  explain  what  are  the  conditions  of  the 
problem  as  it  actually  exists ;  and,  finally,  to  forecast  the  prob- 
able changes  in  the  institutions  as  a  result  of  an  alteration  in 
the  conditions  of  the  problem.  Economic  science,  in  short, 
while  it  deals  primarily  with  the  present,  cannot  avert  its  glance 
from  the  past  or  from  the  future. 


Part   II. 
Elements  of  Economic   Life. 


Book  I. 

Foundations  of  Economic  Life. 


CHAPTER   III. 
THE  NATURAL  ENVIRONMENT. 

15.  References. 

C.  de  Montesquieu,  Spirit  of  the  Laws  (last  ed.,  1902) ;  H.  T.  Buckle,  -His- 
tory of  Civilization  in  England  (best  ed.,  3  vols.,  1873) »  ^.  Spencer,  Princi- 
ples of  Sociology,  I  (1882),  part  i,  ch.  iii;  E.  J.  Payne,  History  of  America, 
I  (1892),  298-480;  Livingston  Farrand,  Basis  of  American  History  (Am. 
Nation,  II,  1905),  chs.  i-iv  ;  Ellen  C.  Semple,  American  History  and  its 
Geographical  Conditions  (1903) ;  A.  P.  Brigham,  Geographic  Influences  in 
American  History  (1903);  G.  G.  Chisholm,  Handbook  of  Commercial 
Geography  (4th  ed.,  1903);  S.  Trotter,  Geography  of  Commerce  (1903); 
N.  S.  Shaler,  The  United  States  (2  vols.,  1894) ;  and  Nature  and  Man  in 
America  ( 1891 )  ;  R.  S.  Tarr,  Economic  Geology  of  the  United  States  (1900) ; 
F.  H.  Newell,  Irrigation  in  the  United  States  (1902);  E.  Mead,  Irriga- 
tion Institutions  (1902) ;  W.  E.  Smythe,  The  Conquest  of  Arid  America 
(1900) ;  R.  M.  Hurd,  Principles  of  City  Land  Values  (1903),  chs.  iii,  iv  ; 
Ross,  Foundations  of  Sociology  (1905),  chs.  viii,  x. 

16.   Climatic  and  Geological  Conditions. 

Man,  like  all  animals,  is  indissolubly  bound  to  the  soil.  He 
is  in  last  resort  dependent  upon  nature  for  what  he  is  and  what 
he  has  accomplished.  This  is  especially  true  of  his  economic 

36 


§  16]  Climatic  Conditions.  37 

life,  which,  as  we  have  seen,  consists  ultimately  of  his  relations 
to  material  things.  The  basis  of  economic  activity  is  the 
material  environment.  The  modern  sciences  of  geology,  of 
meteorology  and  of  commercial  and  anthropo-geography  have 
enabled  us  to  comprehend  phenomena  whose  significance  was 
until  recently  but  vaguely  apprehended.  The  economic  aspects 
of  the  natural  environment  may  be  subsumed  under  the  four 
heads  of  the  climate,  the  geological  structure,  the  flora  and 
fauna  and  the  geographical  location. 

Only  a  portion  of  the  globe  is  habitable.  The  uninhabitable 
parts,  moreover,  change  with  the  geologic  ages.  Large  sec- 
tions of  Northern  Europe  and  America  which  are  now  the 
homes  of  a  vast  population  were  aeons  ago  in  the  perpetual 
embrace  of  the  ice  king.  On  the  other  hand,  explorations 
in  the  sandy  wastes  of  the  Asiatic  deserts  have  brought  to 
light  the  ruins  of  numerous  and  populous  cities.  Not  only 
economic  life,  but  all  life,  is  at  the  mercy  of  the  elemental 
forces  of  nature. 

Even  in  the  habitable  portions  of  the  globe  the  climatic  con- 
ditions are  of  the  first  importance.  At  the  very  outset  the 
influence  of  temperature  is  obvious.  The  rigor  of  the  arctic 
regions  and  the  bounty  of  the  tropical  zone  are  alike  hostile 
to  economic  progress.  Where  the  food  supply  is  scanty  and 
the  low  temperature  benumbing,  human  resources  are  taxed  to 
the  utmost  in  securing  the  bare  wherewithal  of  life,  and  no 
surplus  energy  is  left  to  accumulate  a  store  of  wealth.  Where, 
on  the  other  hand,  nature  pours  out  her  treasures  with  a  lavish 
hand,  and  the  torrid  heat  enervates  and  lulls  into  lethargy, 
scarcely  any  activity  is  needed  to  procure  subsistence,  and 
little  is  ordinarily  exerted  for  other  purposes.  Although  we 
have  had  civilization  in  hot  countries,  the  real  home  of  the 
greatest  economic  progress  has  always  been  in  the  temperate 
zones,  where  man  is  goaded  out  of  his  natural  laziness  by  the 
prick  of  want,  and  lured  on  to  effort  by  the  hope  of  reward. 

In  many  other  ways  does  climate  affect  economic  life.  The 
alternations  of  heat  and  cold,  both  seasonal  and  occasional, 


38  Natural  Environment.  [§  16 

are  of  commanding  importance.  The  character  and  length  of 
the  seasonal  alternations  condition  the  size  and  quality  of  the 
harvest.  The  variations  of  intra-seasonal  temperature  with 
its  sudden  oscillations  go  far  to  explain  the  nervous,  active 
American  temperament  and  its  economic  results,  as  compared 
with  the  comparative  stolidity  of  the  English,  due  to  an  equable 
climate.  Scarcely  second  to  the  influence  of  temperature  is 
the  significance  of  the  rainfall  and  the  humidity.  Insufficiency 
of  moisture  and  lack  of  sunshine  are  alike  inimical  to  economic 
welfare.  Not  only  will  differences  in  rainfall  affect  the  forestry 
conditions,  as  well  as  the  size  and  therefore  the  economic 
utility  of  the  rivers,  but  in  addition  the  laborious  contest 
with  a  semi-arid  region  will  create  in  the  individual  stalwart 
economic  and  political  qualities.  The  so-called  Anglo-Saxon 
individualism  is  largely  the  product  of  climatic  conditions. 
When  the  Englishman  leaves  his  moist  and  fertile  home  for  the 
almost  riverless  wastes  of  the  antipodes,  he  becomes,  if  not  a 
socialist,  at  all  events  the  next  remove  to  one.  In  Australia  we 
accordingly  find  government  railroads,  government  insurance, 
government  steamships,  government  frozen-meat  industry  and 
many  other  examples  of  government  activity  which  would  be 
viewed  with  dismay  in  the  mother  country. 

In  the  same  way  the  individualist  theory  in  America  is 
largely  the  product  of  definite  economic  conditions,  resting  on 
a  new  climatic  environment.  What  careful  interpreter  of 
American  history  does  not  know  that  the  arduous  struggles 
with  a  rebellious  soil  and  an  inhospitable  climate  caused  the 
American  of  a  century  ago  to  turn  to  government  whenever  he 
thought  he  might  secure  help?  State  roads,  state  canals,  state 
railroads,  state  bounties,  state  enterprises  of  all  kinds  suited  to 
the  needs  of  the  settlers  were  the  order  of  the  day.  When, 
however,  the  mountains  had  been  crossed  and  the  fertile  valleys 
of  the  Middle  West,  with  abundant  rainfall  and  a  genial  climate, 
had  been  reached,  there  came  a  wondrous  change.  Conscious 
of  their  new  opportunities,  the  citizens  now  desired  only  to  be 
let  alone  in  their  quest  for  prosperity.  Private  initiative 


§  16]  Geological  Conditions.  39 

replaced  government  assistance  and  the  age  of  corporations 
was  ushered  in.  Insensibly  the  theory  of  governmental  func- 
tions changed,  and  the  doctrine  of  laissez  faire  carried  all 
before  it.  The  theory  of  individualism  was  a  natural  result  of 
the  economic,  and  at  bottom  of  the  climatic,  conditions  of  a 
new  environment. 

While  the  climate  is  one  of  the  causes  that  influence  the 
earth's  surface,  the  economic  life  is  profoundly  affected  by  the 
entire  geological  formation.  In  the  first  place  we  have  the 
fundamental  fact  of  altitude,  including  the  distinction  between 
mountain  and  valley,  coast  and  plain,  with  their  varying  degrees 
of  production.  Furthermore,  upon  the  chemical  ingredients 
and  the  physical  constituency  of  the  soil  rests  in  last  analysis 
its  original  fruitfulness.  The  difference  between  the  soil  of  the 
black  belt  and  the  hill  lands  of  Alabama  explains  the  varying 
aspect  of  the  negro  problem  there ;  and  in  like  manner  the 
contrast  between  the  arable  and  the  grazing  lands  of  the  Far  West 
enables  us  to  comprehend  the  economic  and  political  conflicts 
between  the  farmer  and  the  ranchman. 

Of  still  more  importance  than  the  surface  of  the  earth  is 
what  lies  beneath  the  surface.  There  are  writers  who  interpret 
the  entire  progress  of  humanity  in  terms  of  the  metals.  While 
this  is  assuredly  an  exaggeration,  there  is  no  doubt  that  the 
metals  have  played  a  dominating  role  in  the  history  of  economic 
progress.  In  more  primitive  times  the  advance  of  civilization 
was  in  many  places  in  large  measure  bound  up  with  the  copper 
and  tin  deposits.  Even  at  present,  with  the  active  interchange 
of  commodities,  the  mineral  wealth  in  the  shape  of  copper  and 
iron  fields,  gold  and  silver  mines,  lead  and  tin  deposits,  goes 
far  to  explain  the  preponderance  of  the  fortunate  countries  or 
sections  where  they  are  found.  If  we  add  to  the  metals  the 
coal,  the  diamond  and  the  oil  fields,  we  shall  readily  recog- 
nize the  enormous  influence  exerted,  especially  in  modern 
times,  by  the  existence  of  these  mineral  treasures  in  such 
places  as  Colorado,  Pennsylvania,  Western  England,  and  South 
Africa. 


40  Natural  Environment.  [§  17 

17.   The  Flora,  the  Fauna  and  the  Geographical  Location. 

The  character  and  extent  of  the  vegetable  and  animal  life 
are  a  result  of  the  climatic  and  geological  conditions  that  have 
just  been  mentioned.  Upon  the  union  in  proper  proportions 
of  rain,  sun  and  chemical  ingredients  of  the  soil  depends  the 
possibility  of  raising  all  the  staple  crops  like  hay,  wheat, 
cotton,  rice,  tobacco,  sugar,  coffee  or  tea,  or  of  obtaining  the 
timber,  rubber,  cork  and  other  products  of  the  forest.  The 
American  Indian  civilization  was  built  up  to  a  large  degree 
on  maize,  as  that  of  the  Asiatic  Indian  largely  rested  on  rice. 
If  cotton  was  king  in  the  South  before  the  war,  wheat  and  hay 
were  to  a  great  extent  the  monarchs  in  the  North.  The  con- 
trol of  these  natural  resources  is  responsible  for  many  of  the 
mutations  of  nations.  To  give  only  two  examples  :  the  strug- 
gle for  the  spice  islands  of  the  East  is  the  key  that  unlocks  the 
mysteries  of  the  European  political  contests  of  the  sixteenth 
and  seventeenth  centuries ;  the  sugar  situation  in  Cuba  led  to 
the  revolution  which  brought  about  our  recent  Spanish  war, 
and  thus  indirectly  the  expansion  of  the  American  republic 
into  imperialism. 

Of  at  least  equal  importance  in  early  economic  progress 
is  the  existence  of  animals  that  can  easily  be  domesticated. 
The  fact  that  the  horse,  the  cow  and  the  sheep  were  found  in 
Asia  rendered  possible  the  transition  from  the  hunting  to  the 
pastoral  stage  and  laid  the  foundation  of  the  later  economic 
edifice  of  the  more  advanced  Asiatic  and  European  races. 
For  these  animals  subserved  the  various  onds  not  only  of  food 
supply  and  provision  of  clothing,  but  of  means  of  locomotion 
and  above  all  of  beast  of  burden.  Their  absence  in  recent 
geological  periods  in  America  was  perhaps  the  chief  cause  of 
the  backwardness  of  the  Indians.  Where  a  relatively  advanced 
civilization  was  reached,  as  by  the  Incas  in  Peru,  it  was  in  great 
part  due  to  the  existence  of  the  llama,  although  the  inferiority 
of  this  animal  to  the  horse,  the  cow  and  the  sheep  explains  in 
large  measure  the  backwardness  of  the  South  American  civili- 


§  1 7]  Geographical  Location.  41 

zation.  In  Australia  there  was  not  even  this  resource,  for  the 
kangaroo  could  not  be  utilized  and  the  blackfellow  remained 
a  savage. 

In  contrast  to  the  flora  and  fauna  which  are  of  importance 
from  the  first,  favorable  situation,  although  it  also  plays  a  role 
from  the  outset,  becomes  of  signal  importance  in  the  later 
stages  of  economic  life  when  commerce  has  developed.  Prox- 
imity to  the  sea,  possession  of  a  safe  and  ample  harbor,  loca- 
tion on  a  river,  —  all  these  explain  the  maritime  supremacy  on 
which  so  much  of  past  civilization  has  rested.  It  is  no  mere 
accident  that  the  world's  progress  centred  for  many  centuries 
around  the  Mediterranean,  and  that  Egypt,  Greece  and  Rome 
in  turn  controlled  for  thousands  of  years  the  destinies  of  the 
human  race.  Passing  over  the  mediaeval  Italian  seaports  and 
the  German  Hansa  towns,  it  is  again  significant  that  the  two 
greatest  metropolitan  centres  of  the  world  to-day,  London  and 
New  York,  have  attained  their  position  chiefly  because  of  their 
maritime  importance.  Some  writers  have  even  gone  so  far  as 
to  maintain  that  all  civilization  can  be  expressed  in  terms  of 
the  great  rivers  and  seas.  Of  the  twenty  largest  cities  of  the 
United  States,  nine  are  found  on  the  seacoast,  five  on  the 
Northern  lakes,  and  five  on  the  Mississippi  and  Ohio  rivers. 

It  would,  however,  be  a  mistake  to  lay  too  much  stress  upon 
mere  water  communication.  Trade  conducted  on  terra  firma 
has  played  a  scarcely  smaller  role.  Many  a  populous  city  is 
nothing  but  the  development  of  a  cross-roads  village,  become 
the  busy  mart  of  transit  on  a  great  thoroughfare.  The  centres 
of  the  Babylonian  and  Assyrian  civilization  of  old  were  largely 
of  this  character ;  and  to  a  similar  favorable  inland  situation 
must  we  ascribe  the  prosperity  of  numerous  cities  in  all  parts 
of  the  world  to-day,  such  as  Berlin,  Manchester  (England), 
and  Denver,  especially  where  the  rivers  are  few  or  small.  A 
distinguished  French  author,  Demolins,  has  even  ventured  to 
explain  the  existence  of  the  primary  social  types  of  humanity 
by  the  land  routes  which  the  various  nations  traversed  in  the 
course  of  the  long  migrations  from  their  ancestral  home  to 


42  Natural  Environment.  [§  18 

their  present  abodes.  However  exaggerated  this  insistence 
upon  a  single  factor  may  be,  there  is  little  doubt  as  to  the  car- 
dinal influence  of  location  upon  commercial  opportunities. 

With  the  further  development  of -economic  life,  commerce 
becomes  a  handmaid  not  only  to  agriculture  but  to  industry. 
The  industrial  centres  are  dependent  not  only  on  the  commer- 
cial facilities  for  disposing  of  their  products,  but  also  upon  the 
ease  with  which  they  can  secure  the  raw  material  and  cheap 
power.  Contiguity  to  the  coal  and  iron  fields  explains  the 
growth  of  the  great  steel  industries.  The  presence  of  local 
water  power  made  possible  the  early  centres  of  the  textile 
industries  in  New  England,  as  well  as  the  rapid  growth  of 
Minneapolis  in  milling.  The  grain  fields  of  the  Middle  West 
are  responsible  for  the  breweries  in  the  western  and  the  distil- 
leries in  the  Eastern  States  adjoining  the  Mississippi.  The 
slaughtering  and  meat-packing  centres  have  gradually  moved 
west  with  the  change  in  the  ranching  frontier,  and  the  incipient 
industries  of  the  Pacific  slope  are  still  largely  determined  by 
their  propinquity  to  the  forests,  the  orchards  or  the  river 

fisheries. 

18.   Changes  in  Environment. 

While  man  is  thus  subservient  to  nature  in  his  economic 
activities,  the  subjection  is  not  complete.  In  fact  the  distin- 
guishing mark  of  difference  between  men  and  animals  is  that 
while  the  natural  environment  moulds  all  living  things,  man 
alone  can  to  some  extent  modify  the  environment.  This 
partial  control  of  economic  resources  depends  on  the  spread 
of  intelligence,  the  growth  of  technique  and  the  command 
that  science  gives  over  the  forces  of  nature. 

Of  all  the  natural  conditions  the  climate  is  the  most  difficult 
to  alter.  Yet  even  here  a  beginning  has  been  made.  We  pass 
over  with  a  mere  mention  such  minor  points  as  the  mitigation 
of  the  effects  of  undue  heat  through  the  introduction  of  artifi- 
cial ice,  or  the  creation  of  the  proper  atmospheric  conditions 
in  certain  factories.  More  significant  are  the  effects  of  forestry 
and  irrigation.  It  is  now  coming  to  be  recognized  that  forests 


§  1 8]  Changes  in  Environment.  43 

play  an  important  role,  not  so  much  in  affecting  the  rainfall,  as 
in  equalizing  the  flow  of  the  rivers  and  thus  obviating  the  sudden 
alternations  of  inundation  and  drouth  with  their  devastating 
effects  on  cultivation.  The  afforestation  of  treeless  lands  and 
the  reforestation  of  denuded  hillsides  are  at  present  a  part 
of  the  economic  policy  of  every  careful  government.  The 
marked  increase  in  the  American  forest  reservations,  state  as 
well  as  national,  is  therefore  a  subject  for  congratulation. 

The  conditions  of  moisture  are  further  affected  by  the 
drainage  and  reclamation  of  swamps  and  marshes.  Prominent 
illustrations  of  such  effects  are  visible  in  the  English  fens  and 
the  once  submerged,  but  now  dyke-protected,  lands  of  Holland. 
The  history  of  the  Italian  Maremma,  again,  shows  the  alternate 
consequences  of  neglect  and  intelligent  effort  on  climate  and 
soil.  Even  greater  results  can  be  achieved  by  diminishing 
aridity  rather  than  by  decreasing  excessive  moisture.  Irrigation 
was  practised  by  the  Babylonians,  the  Persians  and  other  na- 
tions of  antiquity,  and  on  a  somewhat  larger  scale  by  the  Arabs 
of  mediaeval  Spain.  The  recent  damming  of  the  Nile  by  the 
British  constitutes  perhaps  the  high- water  mark  of  modern 
achievement.  It  is  in  the  United  States,  however,  that  the 
greatest  conquests  of  irrigation  are  to  be  expected.  With  the 
gradual  exhaustion  of  the  arable  area  in  our  public  domain  the 
demand  for  a  reclamation  of  the  so-called  arid  lands  has  been 
urged  with  increasing  intensity.  The  success  of  the  Mormons 
in  Utah  and  the  efforts  of  a  few  private  companies  in  California 
and  elsewhere  in  converting  the  desert  into  a  smiling  and 
exuberantly  fertile  district  have  shown  what  can  be  accom- 
plished. The  Newlands  law  of  1902  which  set  aside  for  irri- 
gation purposes  under  national  control  the  large  sums  to  be 
derived  from  the  sales  of  public  lands  marks  the  beginning  of 
a  new  epoch  in  American  history,  for  it  will  ultimately  lead 
to  the  recovery  of  several  tens  of  millions  of  acres  and  to  the 
influx  of  corresponding  millions  of  settlers. 

The  nature  of  the  soil  as  affected  by  geological  conditions 
is,  as  we  have  seen,  of  momentous  significance.  Yet  nothing 


44  Natural  Environment.  [§  18 

is  more  certain  than  the  great  influence  of  human  effort  on  the 
character  of  the  soil.  Just  as  the  best  land  can  become  the 
poorest  through  wasteful  cultivation,  so  the  worst  land  can  be 
converted  into  the  most  fruitful.  The  application  of  manures, 
both  animal  and  mineral,  and  the  replacement  of  an  extensive 
by  an  intensive  cultivation  with  the  proper  rotation  of  crops 
will  soon  change  the  chemical  ingredients  of  the  soil.  The 
problem  is  not  one  of  technical  possibility,  but  of  economic 
profit.  Up  to  this  time  there  has  been  in  the  greater  part  of 
the  western  world  such  an  abundance  of  successively  fresh 
tracts  of  land  that  adequate  returns  have  been  achieved  by  the 
extensive  methods  of  cultivation  involving  only  the  most  super- 
ficial tillage.  Even  the  so-called  more  intensive  cultivation 
has  denoted  only  the  slightest  application  of  capital  to  land. 
In  the  Oriental  countries,  on  the  other  hand,  the  ignorance  of 
scientific  agronomy  has  made  intensive  culture  depend  almost 
wholly  upon  the  hand  and  not  the  head.  What  is  really  meant 
by  the  possibilities  of  the  application  of  science  and  capital 
to  agriculture,  in  some  such  proportions  as  they  are  now 
utilized  in  industry,  may  be  faintly  discerned  in  the  garden 
patches  and  truck  farms  in  the  neighborhood  of  great  cities. 
In  certain  parts  of  Europe,  in  fact,  the  tenant  on  the  expira- 
tion of  the  lease  has  the  right  of  carting  away  with  him  a 
certain  depth  of  soil.  The  land  itself  is  thus  coming  to  be  in 
a  sense  the  product  of  human  energy. 

While  the  existence  of  the  flora  and  the  fauna  ultimately 
depends  on  the  physical  environment,  there  is  a  large  margin 
of  indifference  within  which  old  species  may  be  reintroduced 
or  new  ones  made  to  flourish.  Many  plants  in  all  parts  of  the 
world  are  not  indigenous.  To  mention  only  a  few  American 
products,  rice  and  cotton  in  the  South,  the  sugar  beet  and  the 
alfalfa  in  the  West,  as  well  as  all  kinds  of  vegetables  and  fruits 
throughout  the  length  and  the  breadth  of  the  land,  have  been 
introduced  by  human  agency  from  abroad  ;  and  the  experiment 
stations  are  constantly  at  work  improving  the  seed.  To  pass 
from  plants  to  animals,  there  is  no  need  of  pointing  out  the 


§  19]  Changes  in  Location.  45 

marvellous  results  accomplished  in  bettering  the  breed  and 
economic  efficiency  of  the  horse,  the  ox  and  the  sheep, 
none  of  which  were  found  here  in  the  age  of  Columbus. 

19.  Changes  in  Location. 

By  far  the  most  important  achievement  of  man  in  altering 
the  natural  environment  is  to  be  seen  in  his  success  in  over- 
coming the  influences  of  location.  This  has  been  effected 
through  a  threefold  improvement  in  the  methods  of  trans- 
portation and  communication,  that  is,  the  transportation  of 
commodities,  the  transmission  of  power  and  the  communi- 
cation of  ideas.  / 

(i)  Upon  the  transportation  of  commodities  has  depended 
the  growth  of  all  internal  trade  and  international  commerce. 
The  very  conception  of  commerce  involves  the  transfer  of  the 
superfluities  of  one  section  to  the  consumers  of  another,  that 
is,  the  weakening  or  the  annihilation  of  distance  as  an  eco- 
nomic factor.  So  long  as  commerce  was  dependent  upon 
the  sail-boat  or  the  slow- moving  beast  of  burden,  this  annihi- 
lation of  distance  found  its  well-defined  limits  in  the  cost  and 
time  of  transportation.  With  the  invention  of  the  canal  and 
the  application  of  steam  and  electricity  to  land  and  sea  trans- 
port, a  revolution  was  effected  in  the  saving  of  cost  and  time, 
and  perishable  as  well  as  bulky  commodities  were  now  brought 
within  the  range  of  both  ordinary  and  distant  trade.  The 
railway  has  largely  replaced  natural  advantages  of  situation  by 
artificial  ones.  A  town  on  the  railway  line  is  for  all  economic 
purposes  nearer  the  market  than  another  off  the  line,  even  if 
possessed  of  a  better  natural  location.  A  competitive  centre 
at  the  junction  of  several  roads  enjoys  a  superiority  which  will 
enable  it  to  overcome  a  rival  more  advantageously  situated  by 
nature  but  less  well  served.  With  the  increase  of  facilities  and 
lowering  of  cost,  geographical  situation  is  yielding  to  the  facts 
of  artificially  created  location. 

Changes  in  transportation  facilities  accordingly  are  largely 
responsible  for  the  growth  and  decline  of  cities,  sections  and 


46  Natural  Environment.  [§  19 

nations.  With  every  shifting  of  trade  routes,  communities 
advance  and  recede.  Again  to  confine  ourselves  to  recent 
history,  the  completion  of  the  Erie  canal  in  1825  gave  to  New 
York,  then  a  city  of  secondary  importance,  a  position  of  undis- 
puted pre-eminence ;  the  construction  of  many  a  railroad  threw 
into  decay  the  villages  on  the  old  post-roads  not  served  by 
the  new  lines ;  the  piercing  of  the  Isthmus  of  Panama  by  the 
interoceanic  canal  will  have  the  most  far-reaching  conse- 
quences on  the  industrial  efficiency  of  the  South  and  the 
prosperity  of  Great  Britain. 

(2)  If  transportation  of  this  kind  is  so  potent  in  affecting 
the  distribution  of  commodities  and  thus,  by  providing  a 
market,  indirectly  influencing  their  production,  changes  in  the 
transmission  of  power  are  equally  effective  in  their  direct 
influence.  So  far  as  power  is  the  result  of  fuel,  whether  coal, 
wood  or  oil,  it  might  be  claimed  that  the  transmission  of  power 
is  tantamount  to  the  transportation  of  the  commodities  out  of 
which  the  power  is  generated.  The  recent  application  of 
electricity,  however,  bids  fair  to  revolutionize  modern  industry, 
not  only  by  reducing  cost,  but  by  virtually  overcoming  distance. 
Through  transmission  of  electricity  water  power  is  no  longer 
limited  in  its  beneficent  results  to  the  localities  in  the  imme- 
diate neighborhood.  With  the  gradual  extension  of  the  prof- 
itable area  of  such  transmission,  we  may  expect  to  witness  a 
great  change  in  the  geographical  dependence  of  industrial 
centres.  Moreover,  if  the  day-dreams  of  certain  scientists 
are  ever  realized,  so  that  in  the  not  distant  future  we  shall 
be  able  to  pick  up  electricity  from  the  surface  of  the  earth,  the 
last  link  in  the  chain  of  the  industrial  advantages  of  natural 
k>cation  of  power  will  be  destroyed. 

It  must  also  not  be  forgotten  that  power  in  industry  includes 
not  only  mechanical  power,  but  human  power.  The  provision 
of  the  labor  force  itself  is  vitally  affected  by  changes  in  the 
facilities  of  transportation.  In  a  modern  metropolis  it  may 
be  of  comparatively  little  importance  whether  it  takes  a  few 
hours  more  or  less  to  transfer  commodities  to  the  home  or  the 


§  19]  Changes  in  Location.  47 

factory.  Beyond  a  certain  limit,  however,  almost  every  minute 
counts  in  the  time  required  for  the  human  worker  to  reach  his 
home.  The  introduction  of  electric  transportation  prodigiously 
augmented  the  possible  size  and  industrial  power  of  modern 
cities,  but  the  bringing  of  the  suburbs  within  the  city  limits 
has  greatly  affected  values,  and  changed  the  relative  advan- 
tages, industrial  as  well  as  domestic,  of  outlying  and  inter- 
mediate areas.  There  is  a  well-nigh  kaleidoscopic  change 
going  on  in  the  conditions  of  geographical  location. 

(3)  Finally,  the  communication  of  intelligence  has  played 
its  part  in  reducing  the  significance  of  geographical  location. 
The  post,  the  telegraph  and  the  telephone  have  co-operated 
with  other  economic  factors  in  giving  to  the  modern  market 
an  international  character.  The  least  change  in  the  visible 
supply  of  wheat  in  Minnesota  or  of  cotton  in  Texas  is  reflected 
in  the  market  at  Liverpool.  Any  alteration  in  the  conditions 
of  the  tobacco  yield  in  Java  or  of  the  tea  crop  in  China  is  felt 
in  the  exchanges  of  New  York.  But,  above  all,  the  dependence 
of  particular  sections  or  countries  upon  mere  location  has 
been  weakened  in  a  special  sense  by  the  spread  of  modern 
science.  Science  is  international  in  its  workings ;  the  utili- 
zation of  discovery  and  invention  is  no  longer  the  exclusive 
possession  of  a  favored  nation.  The  whole  world  is  becoming 
akin  in  production,  as  in  consumption. 

Thus  it  is  clear  that  while  external  nature  still  plays  its 
fundamental  role  in  explaining  the  economic  life  of  man,  the 
progress  of  civilization  is  utilizing  in  countless  ways  certain 
natural  forces  to  counteract  and  to  minimize  the  influence  of 
other  natural  forces.  Nature  at  bottom  remains  the  mistress, 
but  man  can  within  certain  limits  emancipate  himself  from  the 
bondage,  and  secure  a  mastery  which  will  insure  prosperity 
and  progress. 


CHAPTER   IV. 
THE   POPULATION. 

20.  References. 

C.  D.  Wright,  Practical  Sociology  (Am.  Citizen  Series,  1904),  chs.  ii,  v, 
viii ;  R.  Mayo-Smith,  Statistics  and  Sociology  ( 1895),  Part  *  '•>  A.  F.  Weber, 
Growth  of  Cities  (1899),  chs.  iii,  v,  vi ;  Twelfth  Census,  volumes  on  Popu- 
lation ;  W.  F.  Willcox,  A  Discussion  of  the  Increase  of  Population  (Twelfth 
Census,  Bulletin,  No.  4, 1904) ;  U.  S.  Industrial  Commission,  Report,  XIX 
(1902),  1-13 ;  Tenement  House  Department  of  New  York  City t  First  Sefort 
(2  vols.,  1904) ;  W.  Ogle,  On  Marriage  Kates  and  Marriage  Ages  (Jour. 
Stat.  Soc.,  LIII,  1890) ;  J.  Bertillon,  Morbidity  and  Mortality  according  to 
Occupation  (Ibid.,  LV,  1892) ;  F.  S.  Crum,  Marriage  Rate  in  Massa- 
chusetts (Am.  Statist.  Assoc.  Publications,  V,  1896),  and  Birth  Rate  in 
Massachusetts  (Quart.  Jour.  Econ.,  XI,  1897) ;  R.  R.  Kuczynski,  The 
Fecundity  of  the  Native  and  Foreign  Born  Population  in  Massachusetts 
(Ibid.,  XVI,  1902) ;  J.  Bonar,  Malthus  a nd  his  Work  (1885);  H.  Spencer, 
Principles  of  Biology,  part  vi,  ch.  xii ;  S.  N.  Patten,  The  Law  of  Popula- 
tion Restated  (Pol.  Sci.  Quart,  X,  1895);  F.  A.  Fetter,  The  Essay  of 
Malthus;  a  Centennial  Review  (Yale  Review,  VII,  1899);  E.  A.  Ross, 
Foundations  of  Sociology  (1905),  ch.  ii. 

21.   Density  of  Population. 

While  the  problem  of  external  nature  is  primarily  physical, 
that  of  population  is  principally  biological  and  sociological. 
Population,  however,  also  has  its  economic  aspects.  It  touches 
the  field  of  production  in  so  far  as  there  is  a  relation  between 
the  size  and  constitution  of  the  population  and  the  creation 
of  wealth ;  it  affects  the  subject  of  distribution  because  with 
a  given  quantity  of  production,  the  per  capita  dividend  will 
obviously  be  influenced  by  the  size  of  the  divisor. 

The  subject  falls  naturally  under  the  heads  of  the  status 
and  the  movement  of  the  population.  By  the  status  of  the 

48 


§  21]  Density  of  Population.  49 

population  are  meant  its  density  and  distribution ;  under  the 
movement  of  population  we  have  to  consider  its  increase  and 
its  mobility. 

The  density  of  the  population  is  conditioned  by  the  charac- 
ter of  the  economic  resources  and  the  degree  of  economic 
development.  That  is,  it  depends  not  only  upon  the  external 
environment,  but  upon  the  use  made  of  it  by  man.  The 
density  and  distribution  of  population  as  dependent  upon 
drainage,  altitude,  temperature  and  humidity,  which  play  a 
considerable  role  in  the  tables  of  the  American  census,  may 
be  passed  over  here  as  referable  to  the  influence  of  the  natural 
elements.  The  human  element,  by  transforming  the  environ- 
ment, becomes  the  increasingly  important  factor  in  economic 
progress.  It  is  manifest,  for  instance,  that  the  hunting  stage 
can  support  less  inhabitants  to  the  square  mile  than  the 
pastoral,  and  that  an  agricultural  population  must  be  more 
thinly  scattered  than  a  population  engaged  in  industry.  In 
an  agricultural  community,  again,  the  density  of  the  population 
will  vary  with  the  character  of  cultivation.  Population  is  in- 
deed conditioned  by  food  supply ;  but  food  supply  depends 
not  only  upon  the  number  of  acres  but  upon  the  product  per 
acre. 

When  a  community  is  no  longer  self-dependent,  and  carries 
on  exchange  with  another,  greater  inequality  in  the  density 
of  population  becomes  possible.  Industrial  and  commercial 
communities  barter  their  finished  products  for  the  raw  materials 
of  agricultural  sections.  While  the  total  population  still  de- 
pends on  the  total  food  supply,  the  surplus  food  of  the  agri- 
cultural group  is  secured  by  the  industrial  and  commercial 
group,  with  the  result  of  a  greater  concentration  of  popula- 
tion in  the  latter.  Density  of  population  in  any  particular 
country  or  section  which  has  outgrown  primitive  economic 
conditions  thus  depends  not  so  much  on  the  production  of 
food  as  on  the  existence  of  the  wealth  which  can  procure  food. 
England  had  all  through  the  middle  ages  a  far  sparser  popula- 
tion than  France,  because  although  they  both  exported  wheat  it 

4 


50  Population.  [§  21 

was  more  predominantly  agricultural ;  but  in  the  nineteenth 
century,  with  the  prodigious  increase  in  industry  and  com- 
merce, England  became  a  food  importer  and  the  density  of 
the  English  population  soon  exceeded  that  of  the  French. 
The  following  table,  which  gives  the  number  of  inhabitants  per 
square  mile  in  1900—1901,  will  show  the  influence  of  economic 
conditions  on  density : 

Belgium 589       Switzerland 207 

England 437       France 188 

Netherlands 416       India 167 

United  Kingdom       ....  344       Spain 97 

Japan 296       Russia 51 

Italy 294       Turkey 33 

Germany 270       United  States 25 

China 266       Canada 1.75 

Austria 226  South  Australia    ....  0.33 

The  striking  facts  here  are,  first,  that  a  very  intensive  agri- 
culture combined  with  advanced  commerce,  as  in  China  and 
Japan,  can  support  a  population  as  dense  as  that  of  a  highly 
developed  modern  industry;  and  secondly,  that  the  greatest 
density  is  found  in  those  countries,  like  Belgium,  England  and 
Holland,  which  unite  very  diversified  industry  with  a  fairly 
intensive  agriculture.  The  relative  capacity  of  economic 
stages  to  support  population  is  illustrated  by  the  conditions 
of  the  United  States.  The  census  of  1900,  as  appears  from 
the  map  opposite  page  50,  divides  the  country  into  six  groups 
with  a  density  respectively  of  less  than  2,  2  to  6,  6  to  1 8,  1 8 
to  45,  45  to  90,  and  over  90  inhabitants  to  the  square  mile. 
The  first  group  comprises  the  hunting,  trapping,  fishing,  lum- 
bering and  mining  sections ;  the  second  includes  the  grazing 
communities  ;  the  third  contains  the  purely  agricultural  areas ; 
in  the  fourth  group,  still  mainly  agricultural,  commerce  and 
manufactures  have  commenced  to  make  some  progress ;  while 
in  the  fifth  and  sixth  groups  there  is  a  continually  greater 
influence  of  industry.  Computed  by  states  rather  than  by 
sections,  there  are  eight  commonwealths  with  a  density  of 
over  100,  namely,  Ohio,  Maryland,  Pennsylvania,  New  York, 


1  '  Under  2  inhab,  per  sq 

2  to  G  «  M  ., 
G  to  IS  M  „  M 
ill  IS  to  45  „  „  „ 
1J45  to  00  *,  „  „ 
III  90  aud  over 


Copyright,  1903.  ft?/  Longmans,  Green  &  Co.    New  York  &  London. 

DISTRIBUTION  OF  THE  POPULA 

[Reproduced  from  Rep 


Greenwich  93 


DN  OF  THE  UNITED  STATES,  1900. 

of  Twelfth  I\  8.  Census.] 


§  22]        Concentration  of  Population.  51 

Connecticut,  New  Jersey,  Massachusetts  and  Rhode  Island. 
The  conditions  in  each  state  are  indicated  in  the  chart 
opposite  page  52.  It  thus  appears  that  in  some  of  the 
industrial  commonwealths  of  the  United  States  the  density  of 
population  is  about  equal  to  that  of  Europe. 

22.   Concentration  of  Population. 

Slightly  different  from  the  density  is  the  concentration  of 
population.  This  refers  to  the  distribution  between  city  and 
country.  A  greater  density  generally,  but  not  necessarily, 
implies  a  greater  agglomeration.  New  Hampshire,  for  in- 
stance, has  a  greater  density  of  population  than  California, 
but  a  smaller  urban  population. 

The  industrial  revolution  during  the  nineteenth  century  and 
the  changes  in  transportation  and  commerce  by  which  it  has 
been  attended  are  chiefly  responsible  for  the  drift  of  popula- 
tion to  the  cities.  In  1790  3.14  per  cent  of  the  American 
people  lived  in  cities  of  10,000  and  more  ;  a  century  later  the 
seven  colonies  of  Australasia  with  almost  precisely  the  same 
population  as  the  United  States  of  a  century  earlier  had  33.20 
per  cent  living  in  such  cities.  In  1790  3.40  per  cent  of  the 
population  of  the  United  States  lived  in  cities  of  8,000  and 
over;  in  1900  this  proportion  had  grown  to  33.1  percent. 
If  we  include  in  urban  population  centres  of  4,000  people,  the 
percentage  is  37.3.  In  several  states  it  is  far  higher.  Taking 
the  states  whose  urban  concentration  exceeds  that  of  the  aver- 
age for  the  entire  country,  the  percentage  of  the  population 
living  in  cities  of  at  least  8,000  is  as  follows :  Colorado,  38  ; 
New  Hampshire  and  Ohio,  39  ;  Delaware,  41  ;  California,  44  ; 
Pennsylvania,  46  ;  Maryland  and  Illinois,  47  ;  Connecticut,  53  ; 
New  Jersey,  61  ;  New  York,  69  ;  Massachusetts,  76  ;  Rhode 
Island,  8 1.  With  the  exception  of  Colorado,  the  chief  seat  of 
mining  activity,  it  is  obvious  that  these  are  all  industrial  and 
commercial  centres.  In  a  few  states  the  urban  concentration 
even  equals  or  exceeds  that  of  England  and  Wales,  which 
amounted  in  1901  to  68  per  cent  in  towns  over  10,000,  and  to 


52  Population.  [§  22 

77  per  cent  in  towns  over  3,000.  Of  the  other  European 
countries  Belgium  and  Holland  alone  slightly  exceed  the  gen- 
eral average .  for  the  United  States,  while  that  of  Germany  is 
about  the  same,  and  that  of  France  somewhat  less. 

Within  the  cities  themselves  the  concentration  differs  in 
various  quarters  in  almost  as  marked  a  degree  as  it  does  in  the 
different  parts  of  a  country.  The  business  sections  have 
chiefly  a  day  population,  the  fine  residential  quarters  a  com- 
paratively low  density,  the  crowded  slums  an  exceedingly  high 
concentration.  Although  the  recent  application  of  electricity 
to  transportation  has  enormously  extended  the  suburban  area, 
there  are  still  sections  where  the  congestion  in  the  centres 
increases  from  year  to  year,  seemingly  unaffected  by  rapid 
transit.  In  the  tenth  ward  of  New  York,  for  instance  — 
the  most  densely  populated  area  of  the  civilized  world  —  the 
numbers  per  acre  which  amounted  to  524  in  1890  rose  to  670 
in  1904  ;  while  according  to  the  census  made  by  the  Tenement 
House  Department  several  blocks  had  a  density  of  over  1,000. 
Compared  with  these,  the  highest  European  figures  seem  in- 
significant :  Josefstadt  in  Prague,  485  ;  Bonnenouvelle  in  Paris, 
434 ;  Bethnal  Green  North  in  London,  365. 

When  we  reflect  that  in  the  United  States  as  a  whole  over  a 
third,  and  in  several  states  two-thirds  or  three-fourths,  of  the 
people  now  live  in  cities,  and  when  we  notice  that  the  progress 
of  agglomeration  is  unabated,  it  is  apparent  that  as  a  result  of 
the  changing  economic  conditions  the  problems  of  the  national 
life  of  the  future  are  to  be  in  great  measure  city  problems. 
These,  however,  are  largely  social  and  political.  So  far  as 
they  are  economic  in  character  they  fall  principally  under 
such  heads  as  the  influence  of  city  rents  on  the  cost  of 
living  and  rate  of  wages,  the  effects  of  concentration  of  labor 
and  capital  on  production  and  distribution,  and  the  con- 
sequences of  urban  growth  upon  depopulation  of  the  rural 
districts  and  the  scarcity  of  farm  labor.  Some  of  these  will 
be  discussed  later. 


NUMBER   OF   INHABITANTS  TO  THE  SQUARE   MILE, 
BY  STATES  AND  TERRITORIES,  1900. 

Norn—  This  diagram  does  not  include  the  District  of  Columbia,  which  had 
4.6S5.3  inhabitants  to  the  square  mile  in  1900. 
0       25      50      75     100     125    150    175    20O    225   250    275    300  325  350   375    400 

RHODE  ISLAND... 

NEW  JERSEY.  
CONNECTICUT..... 
NEW  YORK-  

OHIO-  

I 

? 

1 

DELAWARE-  
ILLINOIS  - 

KENTUCKY  
TENNESSEE  
VIRGINIA  
NEW  HAMPSHIRE 
MISSOURI  
8.  CAROLINA  
MICHIGAN  
IOWA 

mm 

•Ml 
••• 
mm. 
•• 
mmm 
mm 
mm 
mm 
mm 
mm 
mm 
mm 
mm 
mm 
mm 

mm 
mm 

m 

m 
• 
• 

•• 
•»•• 

mm 
mm 
mm 

mm 
mm 
mm 

mm 

mi 
m 
m 
m 
m 
m 
• 

1 

N.CAROLINA.  
WEST  VIRGINIA-- 
WISCONSIN.   
VERMONT.  ... 
GEORGIA  

ALABAMA  
MISSISSIPPI  
LOUISIANA.  
ARKANSAS  
HAWAII..  
MAINE 

MINNESOTA  
KANSAS  

NEBRASKA  
INDIAN  TER  
TEXAS  
OKLAHOMA  
FLOFHDA  
CALIFORNIA  
WASHINGTON... 
8.  DAKOTA  
COLORADO.  
N.DAKOTA  
OREGON  

UTAH  

IDAHO.  _. 

MONTANA  
NEW  MEXICO.... 
ARIZONA..  
WYOMING  
NEVADA  
ALASKA 

^Reproduced  from  reports  of  Twelfth  U.  S.  Census. 

§  23]          Distribution  of  Population.  53 

23.   Distribution  of  Population. 

The  other  facts  of  distribution  of  population  which  have 
important  economic  bearings  are  those  of  sex,  age  and  occupa- 
tion. The  percentage  of  females  affects  the  labor  market  to 
the  extent  that  women  are  wage-earners,  while  a  considerable 
predominance  of  either  sex  not  only  influences  marriage  and 
fecundity  but  exerts  an  effect  on  social  life  in  general.  Under 
normal  conditions  in  modern  times  there  is  a  slight  excess 
of  females,  in  Europe  about  1,064  females  to  1,000  males. 
Although  the  birth  rate  of  males  exceeds  that  of  females,  there 
is  generally  a  greater  mortality  among  males,  due  in  part  to 
their  more  dangerous  occupation,  in  part  to  their  more  un- 
regulated life.  In  less  civilized  older  countries  there  is  usually 
an  excess  of  males,  owing  in  all  probability  to  the  fact  that 
more  of  the  arduous  labor  there  falls  to  the  lot  of  the  women. 
In  new  countries  like  America  there  is  also  a  slight  excess  of 
males,  ascribable  chiefly  to  immigration,  the  percentage  being 
51.2  males  to  48.8  females.  The  contrast  between  the  older 
and  the  newer  sections  is  marked,  Massachusetts  having  an 
excess  of  females  (51.3  percent)  while  Wyoming  has  only 
37.1  per  cent.  That  the  causes  affecting  distribution  by  sex 
are  largely  economic  is  shown  by  the  fact  that  in  industrial 
and  commercial  centres,  whether  American  or  foreign,  where 
the  hard  work  and  nervous  strain  fall  chiefly  on  the  men,  the 
preponderance  of  females  is  always  accentuated. 

Distribution  by  age  has  important  social  and  political  as- 
pects, especially  as  affecting  the  school,  the  voting  and  the  mili- 
tary population.1  For  economic  purposes,  however,  the  chief 
classification  is  that  of  the  working  population.  Although 
the  proportions  of  the  productive  classes  vary  considerably 
according  to  the  conditions  of  child  labor,  the  commonly  ac- 
cepted limits  are  15  and  65  years  respectively.  As  has  often 

1  Of  the  seventy-six  millions  of  people  in  the  United  States  in  1900, 
twenty-six  millions,  male  and  female,  were  of  the  school  age  (between  5 
and  20),  twenty-one  millions,  male,  of  the  voting  age  (over  21)  and 
sixteen  millions,  male,  of  the  militia  age  (18  to  44). 


54 


Population. 


[§'3 


been  pointed  out  and  as  is  illustrated  by  the   chart   below, 
the  distribution  by  age  may  normally  be  compared  to  a  pyra- 

POPULATION  ACCORDING  TO  AGE   DISTRIBUTION1 


OLD 
PEOPLE 


ADULTS 


INFANTS 


MALES 


FEMALE 


100 
90 
80 
70 
60 
50 
40 
30 
20 
10 


Number  living  § 
in  each       *o 
generation. 


OO 
O  0 

tH  0* 


O 

Ox 

•«• 


Triangle  X  X  represents  an  imaginary  population  completely  stationary,  increasing 
annually  by  a  constant  number  of  births  and  decreasing  by  an  equal  number  of  deaths 
distributed  in  a  precisely  equal  degree  among  the  various  age  groups. 

Figure  A  A  represents  a  population  about  stationary,  with  a  low  birth  rate,  a  low 
death  rate  and  with  little  immigration  or  emigration. 

Figure  B  B  represents  a  population  with  a  high  birth  rate,  a  high  death  rate  and  much 
emigration. 

American  conditions  would  be  represented  by  a  combination  of  the  upper  part  of  A 
and  the  lower  part  of  B,  making  the  curve  look  like  a  top. 

mid,  with  the  infants  at  the  bottom  and  the  aged  at  the  top. 
Where  population  increases  rapidly,  the  base  is  broad  ;  where 
it  increases  slowly,  the  base  is  narrow  and  the  upper  part  of 

1  From  Levasseur,  La  Population  Franfaise,  Vol.  II  (1891),  pp.  257- 
260. 


§  24] 


Increase  of  Population. 


55 


the  pyramid  representing  the  older  classes,  bulges  out,  making 
it  bell-shaped.  Similar  results  are  caused  by  migratory  move- 
ments. In  the  case  of  a  large  immigration  the  middle-age 
classes  expand  and  the  curve  may  be  compared  to  a  top ;  in 
the  case  of  emigration  the  curve  sinks  in  the  middle  and  looks 
like  a  spindle.  It  is  owing  chiefly  to  this  fact  that  in  the  in- 
dustrial states  as  well  as  in  the  urban  centres,  the  curve  is  like 
a  top,  that  is,  with  the  largest  proportion  of  productive  classes. 
The  difference  between  industrial  and  non-industrial  states  is 
illustrated  in  the  following  table  of  distribution  by  ages  ar- 
ranged by  percentages  : 


Years 

0-15 

15-65 

65- 

United  States    
Massachusetts   
South  Dakota   .               .... 

34.30 
27.36 

-JO.-52 

61.66 

67-54 

eg  C7 

4.04 
5.10 

2,T.1 

Massachusetts  had  almost  ten  per  cent  more  of  the  productive 
classes  than  South  Dakota.  A  similar  lesson  is  enforced  by 
foreign  statistics. 

Distribution  by  occupation  naturally  follows  very  closely  the 
utilization  of  the  economic  resources.  Comparative  statistics  of 
different  countries  would  therefore  be  meaningless.  In  the 
United  States  the  tables  on  page  56  show  the  great  increase  in 
the  industrial  classes,  and  throw  an  interesting  light  on  the 
relative  importance  of  the  various  industries  from  the  point  of 
view  of  distribution  of  the  population. 

24.   Increase  of  Population. 

The  increase  of  population  is  normally  dependent  on  the 
existence  of  marriage.  To  the  children  born  in  wedlock  must 
however  be  added  the  illegitimate  births,  which  form  in  dif- 
ferent countries  from  3  to  14  per  cent  of  the  whole.  In  some 
large  cities  like  Paris  the  percentage  is  as  high  as  24,  and 
where,  as  formerly  in  Bavaria,  especially  severe  marriage  laws 


Population. 


[§  24 


exist,  the  percentage  is  even  higher.  The  proportion  of  single 
persons  over  15  years  varies  from  30  to  50  per  cent  in  dif- 
ferent countries,  the  percentage  in  America  being  40  for  men 

PERCENTAGE   OF   DISTRIBUTION   OF   POPULATION   IN 
THE   UNITED   STATES   BY   OCCUPATIONS. 


1880 

1890 

1900 

Agricultural  pursuits    

44-3 

37-7 

35-7 

Professional  service      

3-5 

4.1 

4-3 

Domestic  and  personal  service       .     .     . 

19.7 

18.6 

19.2 

Trade  and  transportation      

10.7 

14-6 

164 

Manufacturing  and  mechanical  pursuits 

21.8 

25 

24.4 

NUMBER   OF   PERSONS    ENGAGED   IN   VARIOUS 
OCCUPATIONS   IN    1900.1 

Carpenters  and  joiners 600,252 

Dressmakers,  seamstresses  and  milliners 585,685 

Steam-railroad  employees 582,150 

Miners  and  quarrymen 563,866 

Iron  and  steel  workers 290,611 

Machinists 283,145 

Painters,  glaziers  and  varnishers 277,541 

Cotton-mill  operatives 246,004 

Tailors  and  tailoresses 229,649 

Blacksmiths 226,477 

Engineers  and  firemen  (not  locomotive) 223,495" 

Hoot  and  shoe  makers 208,912 

Saw  and  planing-mill  employees 161,624 

Masons 160,805 

Printers,  lithographers  and  pressmen I55J47 

Tobacco  and  cigar  operatives 131,452 

and  31  for  women.  If,  however,  we  more  properly  take  the 
people  between  40  and  60  years  as  the  class  that  one  would 
usually  expect  to  see  married,  we  find  that  the  single  persons 
constitute  only  12  to  15  per  cent  of  the  whole.  In  the  Ameri- 
can cities  the  proportion  of  single  persons  is  larger,  owing 


1  Exclusive  of  merchants,  clerks,  draymen  and  agents. 


§  24]  Increase  of  Population.  57 

partly  to  the  postponement  of  marriage  and  partly  to  the  large 
immigration  of  young  unmarried  persons.  The  normal  mar- 
riage rate  in  most  countries  varies  from  14  to  18  married 
persons  annually  for  each  thousand  of  the  population,  with 
considerable  variations  due  to  general  economic  conditions. 
Periods  of  depression,  for  instance,  naturally  diminish  the  pre- 
disposition to  marriage,  while  on  the  other  hand  when  the 
conditions  for  the  employment  of  women  are  favorable,  as  in 
some  of  the  New  England  towns,  the  marriage  rate  is  excep- 
tionally high. 

Of  almost  more  importance  than  the  frequency  of  marriage  is 
its  fecundity.  When  we  compare  the  number  of  births  with  the 
population  as  a  whole,  we  speak  of  a  crude  birth  rate  ;  when  we 
compare  the  births  with  the  number  of  women  of  child-bearing 
age  (15  to  50  years),  we  speak  of  a  refined  or  corrected  birth 
rate.  The  average  number  of  children  to  a  family  varies  in 
different  countries  from  3  to  5.  In  the  same  country  the 
fruitfulness  depends  not  only  on  color  and  nationality,  as  in 
the  United  States,  but  also  on  social  and  economic  conditions, 
according  to  the  sway  of  prudential  considerations.  It  is  a 
notorious  fact  that  the  greatest  fecundity  is  found  in  the  poorer 
classes.  It  is  now  also  well  established  that  birth  rates,  like 
marriages,  differ  at  present  in  cities  of  the  same  size  according 
to  the  prevailing  industry  or  occupation.  The  birth  rate  per 
thousand  of  the  population  as  a  whole  ranges  from  the  excep- 
tionally low  figure  of  22  in  France  to  almost  50  in  Russia  and 
India.  In  the  United  States  it  is  above  35,  but  falling  rapidly 
in  the  Eastern  states.  In  large  parts  of  New  England,  in  fact, 
the  birth  rate  of  native  parents  is  lower  than  in  France,  so  low 
indeed  that  were  it  not  for  the  far  greater  fecundity  of  foreign 
parents  there  would  be  less  births  than  deaths. 

The  increase  of  population  depends,  as  has  just  been  inti- 
mated, not  only  upon  the  birth  rate  but  upon  the  death  rate. 
It  makes  a  great  difference  to  social  progress  whether  a  slow 
increase  of  numbers  is  due  to  the  one  or  to  the  other  cause. 
Whatever  may  be  the  conclusion  as  to  the  desirability  of  a  low 


58  Population.  [§  24 

birth  rate,  there  can  be  only  one  opinion  as  to  the  undesira- 
bility  of  a  high  death  rate.  In  modern  times,  at  least,  civ- 
ilization endeavors  in  every  way  to  arrest  mortality  and  to 
prolong  human  life. 

It  is  quite  unnecessary  to  fortify  by  statistical  data  the 
familiar  fact  that  deaths  vary  according  to  seasons,  age  and 
sex.  In  hot  countries  the  summer,  and  in  cold  countries  the 
winter,  are  the  most  dangerous ;  in  all  places  infant  mortality 
is  by  far  the  greatest ;  and  almost  everywhere  the  male  death 
rate  slightly  exceeds  the  female.  In  making  comparisons  we 
must  again  observe  the  distinction  between  the  crude  and  the 
refined  rate.  The  ordinary  basis  is  the  number  of  deaths  per 
thousand  of  the  population.  Since,  however,  the  rate  varies 
with  sex  and  age,  the  comparison  is  accurate  only  when  made  as 
between  the  same  proportions  of  sex  and  age.  A  rate  reduced 
to  such  proportions  is  called  the  refined  or  corrected  death 
rate.  Otherwise  a  country  with  a  relatively  larger  number  of 
children  would  have  a  higher  death  rate.  For  general  pur- 
poses, however,  it  has  been  found  that  the  results  of  computing 
according  to  the  crude  or  to  the  refined  death-rate  method 
do  not  differ  sufficiently  to  change  the  relative  standing  of 
countries.  In  the  American  statistics  still  further  accuracy  is 
sought  by  correcting  the  death  rate  for  race  as  well  as  age  dis- 
tribution. Using  the  crude  figures,  the  normal  death  rate  in 
modern  communities  now  varies  from  i  7  to  21  per  thousand, 
the  former  being  the  figure  for  the  United  States  in  1900.  In 
the  cities  it  is  considerably  higher  than  in  the  country,  the 
rural  rate  sometimes  being  as  low  as  14  or  15,  and  the  urban 
rate  occasionally  ascending  in  unhealthy  American  cities  to  35 
or  even  50.  The  death  rate  has  been  markedly  reduced  in 
recent  times  by  the  progress  of  science  in  controlling  disease, 
by  the  growing  infrequency  of  war,  and  by  the  economic 
changes  which  have  virtually  eliminated  famine,  except  in 
relatively  backward  countries  like  Russia  and  India.  The 
greatest  improvement,  however,  has  taken  place  in  the  urban 
death  rate,  owing  to  the  immense  strides  in  modern  sanitation, 


THOUSANDS 


800 


700 


600 


500 


400 


300 


200 


100 


ililiiilil 


FOREIGN  IMMIGRATION  TO  THE  UNITED  STATES, 
1840-1901. 


NUMBER  OF  IMMIGRANTS." 
NUMBER  OF  IMMIGRANTS 
TO  10,000  POPULATION. — 


(To  year  ending    Dec.  31,  1855,   figures  show  aliei 
passengers  arrived;  after  year  ending 
Dec.  31,  1855,  immigrants  arrived.) 


HOUSANDS 


700 


500 


400 


From  Report  of   Industrial  Commission  Vol.  XIX. 


YEAR 


li 
11 

105 
100 
95 
90 
85 
80 
75 

70 
</> 
^65 

5  60 

I 

^* 

0 

I50 

_l 

00       1810 

1820        1830        1840        1850        1860        1870        1880        1890       1900 

110 

/ 

105 

INCREASE  OF  POPULATION 

IN  THE 

UNITED  STATES 

AND  THE 

PRINCIPAL  COUNTRIES  OF  EUROP 

FROM 

1800   TO  1900. 

/ 

100 

/ 

95 

E 

X 

90 

/ 

85 

/ 

x 

' 

80 

, 

x 

/ 

75 

70 

2 

6 

z 
60  <» 
0 

55| 

505 

40 
35 
30 
25 
20 
15 
10 
5 
0 

f 

/ 

^ 

1 

ftj 

^ 

xx 

& 

£/ 

x 

^ 

/  : 

X 

&* 

&^ 

5 

40 

or 

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+«?$* 

^* 

^x 

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r^^ 

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5-0-00-0 

-o-o-o-o 

0 

0^0-0 

-0-0-0-0 

o-oo-o-< 

1800       1810        1820        1830        1840        1850 

YEAR 
From  Reports  of  Twelfth  U.S.  Census,  Statistical  Atlas. 


1870        1880        1890       1900 


§  25]  Migration  of  Population.  59 

food  and  milk  inspection,  housing  improvement  and  park  de- 
velopment. Within  a  century  the  death  rate  of  Vienna  has 
fallen  from  60  to  23  ;  within  twenty-five  years  that  of  London 
from  50  to  25  ;  and  within  half  a  century  that  of  New  York 
from  32  to  20.  In  fact,  selected  cities  in  certain  countries 
now  show  a  death  rate  even  lower  than  in  rural  districts. 

25.  Migration  of  Population. 

The  final  factor  which  affects  changes  in  the  population  is 
migration.  Internal  migration  from  place  to  place  as  well  as 
from  occupation  to  occupation  is  the  chief  manifestation  of  the 
modern  mobility  of  labor.  In  former  times  custom,  caste, 
settlement  laws  and  the  like  interposed  serious  obstacles  to 
such  movement.  Now,  under  the  pressure  of  the  economic 
motive,  population  shifts  with  opportunities  of  bettering  one's 
condition.  Migration  between  countries  assumes  the  form  of 
emigration  and  immigration.  While  immigration  swells  the 
population  of  new  countries,  emigration  only  rarely  diminishes 
the  population  of  an  old  country ;  for  the  gap  caused  by  the 
emigrants  is  soon  filled  by  the  results  of  an  increased  birth 
rate  due  to  the  improved  opportunities  at  home.  Ireland  is 
for  special  reasons  a  striking  exception. 

Where  people  emigrate  to  places  under  the  control  of  the 
mother  country  they  form  colonies.  Colonies,  however,  are 
not  only  colonies  of  occupation,  to  afford  an  outlet  for  surplus 
population,  but  also  colonies  of  exploitation,  to  furnish  a  vent 
for  surplus  production  of  commodities.  In  modern  times  we 
may  even  speak  of  a  third  kind  of  colonies  like  those  of  the 
United  States,  where  the  aim  is  neither  emigration  nor  exploi- 
tation, but  rather  the  political  and  economic  elevation  of  the 
indigenous  population. 

If  we  assume  with  the  anthropologists  one  original  habitat 
for  the  human  race,  practically  all  populations  are  composed 
of  immigrants  or  descendants  of  immigrants.  Formerly 
the  migration  was  one  of  tribes  or  nations ;  now  it  is  one 
of  individuals.  In  the  older  civilizations  these  wholesale 


60  Population.  [§  26 

immigrations  even  of  individuals  have  long  since  ceased.  In 
countries  like  the  United  States,  however,  the  movement  is  still 
in  progress  on  a  gigantic  scale,  probably  for  the  last  time 
in  human  history.  Although  the  immigration  has  increased 
largely  for  the  past  half-century,  it  has  not  grown  appreciably 
faster  than  the  native  population.  The  foreign  born  con- 
stituted 13.2  per  cent  of  the  total  population  in  1860;  and 
while  the  proportion  rose  slightly  in  the  succeeding  decade,  in 
1900  it  was  again  about  the  same — 13.7  per  cent.  This  is 
contrary  to  the  current  opinion,  but  is  none  the  less  a  fact.  It 
is  clearly  shown  on  the  maps  and  charts  opposite  pages  58, 
60  and  62,  which  also  illustrate  the  great  increase  in  recent 
years  of  immigrants  from  the  South  and  East  of  Europe  as 
well  as  the  composition  of  the  population  in  1900. 

By  combining  the  natural  increase  with  that  due  to  migra- 
tion we  arrive  at  the  total  increase  of  population.  Up  to  the 
civil  war  the  population  of  the  United  States  grew  slightly 
more  than  a  third  every  ten  years.  Since  1880  the  decennial 
rate  of  increase  has  diminished,  being  about  25  per  cent  for 
the  decade  ending  1890,  and  about  21  per  cent  for  that  end- 
ing 1900.  Notwithstanding  this  diminution  in  the  rate  of 
increase,  it  is  exceeded  only  by  Argentina,  where  the  rate  is 
approximately  as  large  as  that  of  America  before  1860  In 
Europe  the  rate  of  increase  is  only  about  one-half  of  that  of  the 
United  States ;  but  while  it  is  falling  in  the  United  States  it  is 
rising  in  Europe.  On  the  chart  opposite  page  59  will  be  found 
a  statement  of  the  comparative  increase  of  population  in  some 
of  the  more  important  countries  during  recent  decades. 

The  excess  of  births  over  deaths  and  the  rate  of  increase  in 
a  few  typical  countries  for  1900  are  given  in  the  table  on  the 
following  page. 

26.  The  Law  of  Population. 

The  chief  problem  in  the  increase  of  population  is  its  rela- 
tion to  prosperity.  The  so-called  law  of  population,  as  framed 
by  Malthus  at  the  close  of  the  eighteenth  century,  asserts  that 


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Law  of  Population. 


61 


there  is  a  tendency  of  population  to  increase  faster  than  the 
means  of  subsistence,  and  that  this  pressure  of  population  on 
food,  unless  removed  by  preventive  agencies,  will  lead  to  the 
positive  checks  of  misery,  vice  and  crime,  by  which  alone  the 


Birth 
Rate. 

Death 
Rate. 

Excess  of 
Births. 

Per  cent  of 
Decennial 
Increase. 

Population 
(omitting 
ooo). 

United  States  .  . 
England  and  Wales 
Germany  .... 
France  • 

35-1 
30.1 
36.2 
22  2 

17.4 
18.4 
22.5 
21.6 

17.7 
II.7 

137 

0.6 

20.7 
12.  1 

16.2 

1.7 

75,994 
32,526 

56>367 
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Italy  

•?c.c 

24.6 

10.9 

7-2 

32,475 

Hungary  .... 

40.5 

3°-3 

IO.2 

10.3 

19,254 

equilibrium  will  again  be  restored.  Three  conclusions  were 
drawn  from  this  doctrine,  applicable  respectively  to  socialism, 
to  wages  and  to  economic  progress. 

(i)  The  first  point  is  the  one  which  originally  set  Malthus 
thinking.  Some  of  the  French  idealists  and  their  English 
followers  had  been  advocating  equalitarian  or  communistic 
schemes  of  social  regeneration.  Malthus  contended  that  the 
pressure  of  population  on  subsistence  would  effectually  pre- 
clude any  such  ideal  consummation.  (2)  Again,  although 
this  came  somewhat  later,  it  was  claimed  that  wages  depend 
upon  demand  and  supply,  and  that  it  was  therefore  hopeless 
for  the  laborers  to  expect  more  than  a  bare  minimum  wage 
unless  their  numbers  were  checked.  (3)  Finally,  it  was  as- 
serted that  economic  progress  in  general  was  seriously  men- 
aced by  the  danger  of  over-population,  and  it  was  contended 
that  this  could  be  averted  only  by  the  extensive  application  of 
prudence  and  self-restraint,  —  remedies  in  the  efficacy  of  which 
Malthus-  himself  had  not  much  confidence. 

In  the  original  framing  of  the  principle,  Malthus  maintained 
that  the  ratio  of  increase  was  at  best  arithmetical  in  the  case 
of  food,  but  geometrical  in  the  case  of  population.  While  the 
accuracy  of  these  ratios  has  been  successfully  disputed,  it  still 


62  Population.  [§  26 

remains  a  question  as  to  whether  population  really  tends  to 
increase  faster  than  food.  So  far  as  food  is  concerned,  there 
is  no  doubt  that  there  are  definite  limits  to  its  increase,  even 
though  these  limits  are  more  elastic  than  were  originally 
thought.  The  area  of  cultivation  may  be  extended,  im- 
provements of  all  kinds  may  be  applied,  hitherto  unsuspected 
forces  of  nature  may  be  utilized ;  but  in  the  end,  as  we  shall 
see,  the  law  of  diminishing  returns,  which  was  not  at  first 
thought  of  by  Malthus,  will  make  itself  felt. 

With  reference  to  population,  however,  two  considerations 
have  been  advanced  to  offset  the  contentions  of  Malthus,  — 
the  biological  and  the  socio-economic  arguments.  The  bio- 
logical argument  asserts  that  the  power  of  reproduction  itself 
diminishes  with  more  complex  and  civilized  beings,  and  points 
to  the  small  families  of  the  higher  classes  and  to  the  increasing 
sterility  of  the  New  England  women.  This  argument,  however, 
is  by  no  means  indisputable ;  and  it  is  above  all  uncertain 
whether  the  diminishing  ratio  is  natural  or  artificial,  —  that  is, 
whether  or  not  it  is  a  result  of  volition.  The  socio-economic 
argument  claims  that,  as  a  consequence  of  general  social  as 
well  as  economic  reasons,  the  size  of  families  varies  inversely 
with  wealth,  and  thus  keeps  down  the  ratio  of  increase.  With 
the  poorest  classes  every  child  is  regarded  as  a  prospective 
bread-winner,  and  to  that  extent  not  only  a  help  in  the  near 
future  but  an  additional  support  for  old  age.  This  leads  to 
early  and  often  improvident  marriages  and  large  families.  In 
the  next  stratum  of  society  the  demands  of  education  and  of 
the  maintenance  of  a  social  position  induce  more  deliberation 
in  marriage,  and  effectively  bar  the  probability  of  so  numerous 
a  progeny.  Finally,  where  wealth  is  abundant,  the  desire  care- 
fully to  train  a  few  rather  than  to  half  train  many  children,  as 
well  as  the  wish  to  escape  the  nervous  strain  of  a  numerous 
offspring,  conspire  to  restrict  the  number  of  children.  The 
French  peasant  is  not  so  different  from  the  average  American 
or  European  resident  of  a  large  city.  The  economic  motive 
may  be  slightly  stronger  with  the  former,  the  other  social 


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§  26]  Law  of  Population.  63 

motives  slightly  stronger  with  the  latter ;  but  in  essence  they 
are  alike.  Here  again,  however,  the  argument  is  not  anti- 
Malthusian ;  for  the  phenomena  just  described  are  the  results 
of  prudential  considerations,  and  really  fall  under  the  head  of 
the  preventive  agencies  mentioned  by  Malthus. 

It  might  seem,  then,  that  Malthus  was  right  in  his  premises ; 
and  since  the  preventive  considerations  are  proverbially  weak 
in  the  poorer  classes,  it  might  be  claimed  that  he  was  also  jus- 
tified in  his  gloomy  forebodings.  This  conclusion,  however, 
does  not  follow.  The  real  antithesis  is  proximately  at  least 
not  between  population  and  food,  but  between  population  and 
wealth,  or  productive  efficiency.  Through  a  proper  organiza- 
tion and  utilization  of  improved  methods,  production  of  wealth 
in  general  may  be  so  augmented  as  to  permit  an  increase  both 
in  population  and  in  prosperity.  This  has  happened,  for  in- 
stance, all  through  the  nineteenth  century,  even  in  the  older 
countries  of  Europe;  the  industrial  revolution  has  not  only 
multiplied  national  wealth,  but  has  greatly  increased  popula- 
tion, while  reducing  misery,  vice  and  crime.  It  might  be 
contended,  indeed,  that  this  is  exceptional,  because  the  in- 
creased numbers  have  after  all  been  dependent  ultimately 
upon  the  food  supply  which  they  have  secured  from  the  newly 
opened  areas  of  North  and  South  America ;  and  it  might  be 
added  that  the  population  of  these  countries  is  increasing 
so  rapidly  that  sooner  or  later  they  also  will  have  no  surplus 
food  to  export.  Even  granting  this  contention,  however,  and 
looking  forward  to  the  distant  time  when  all  the  huge  and  now 
uncultivated  areas  of  the  earth's  surface  will  be  utilized  for 
food  production,  it  still  remains  true  that  the  increase  of 
wealth  may  for  almost  indefinite  periods  keep  ahead  of  popu- 
lation. For,  as  was  intimated  in  the  last  chapter,  a  really 
intensive  capitalistic  system  of  agricultural  production  has 
never  yet  been  attempted  on  a  large  scale.  If  there  is  enough 
wealth  to  put  into  the  soil,  it  can  be  transmuted  into  food. 
The  diminishing  returns  from  land  can  be  arrested  by  the  in- 
creasing returns  of  a  rapidly  augmenting  efficiency  of  industry 


64  Population.  [§  26 

in  general.  The  food  may  indeed  cost  more,  but  there  will 
be  more  wealth  with  which  to  buy  it. 

Not  only  can  wealth  be  made  to  increase  faster,  but,  as  we 
have  seen,  the  increase  of  wealth  will  in  itself  set  in  motion 
those  economic  and  sociological  forces  which  tend  to  reduce 
the  rate  of  increase  of  population.  Thus  from  both  sides  the 
antithesis  of  wealth  and  population  may  be  weakened.  Under 
favorable  conditions  population  may  increase  gradually,  and 
wealth  rapidly. 

It  is  clear,  however,  that  these  favorable  conditions  include 
those  of  distribution  as  well  as  production.  The  communists 
against  whom  Malthus  wrote  were  mistaken,  but  not  for  the 
reason  alleged  by  him.  They  thought  that  a  mere  change  in 
the  distribution  of  wealth  would  suffice  to  bring  prosperity. 
They  failed,  just  as  the  socialists  of  to-day  still  fail,  to  realize 
that  even  an  ideal  distribution  is  valueless  without  enough  to 
divide,  and  that  their  schemes  would  dangerously  impair  pro- 
ductive efficiency.  On  the  other  hand,  the  wages-fund  doc- 
trine of  the  English  classical  economists  erred,  as  we  shall 
learn,  chiefly  in  that  it  overlooked  the  connection  between 
wages  and  production,  and  took  no  account  of  the  fact  that, 
given  a  greater  productive  efficiency,  more  workmen  and 
higher  wages  are  perfectly  compatible. 

The  problem  of  population  as  a  whole  is,  then,  not  one  of 
mere  size,  but  of  efficient  production  and  equitable  distribution. 
That  is,  it  is  a  problem  not  of  numbers  alone  but  of  wealth. 
Since  man  is  the  chief  labor  force,  large  numbers  indeed, 
other  things  being  equal,  mean  greater  national  strength  and 
power.  But  the  reverse  may  be  true  if  other  things  are  not 
equal.  A  small  nation  with  greater  productive  efficiency,  like 
England,  will  outrank  a  more  populous  country,  like  India. 
Smaller  numbers  with  a  fairly  equable  distribution  of  wealth 
are  preferable  to  a  dense  population  living  in  the  extremes  of 
misery  and  opulence.  Mere  numbers  are  therefore  not  the 
vital  point.  The  world  has  alternated  in  its  opinion  and  action. 
In  classic  antiquity,  where  the  absence  of  advanced  industrial 


§  26]  Law  of  Population.  65 

methods  soon  set  a  limit  to  production,  over-population  was  a 
real  danger,  tempered  first  by  emigration  and  then  by  infanti- 
cide. In  the  middle  ages  population  was  sparse,  and  yet, 
because  of  undeveloped  production,  kept  down  by  famine  and 
disease.  With  the  growth  of  enterprise  in  the  fifteenth  and 
sixteenth  centuries,  increase  of  population  was  favored  but  not 
always  secured.  The  conditions  at  the  close  of  the  eighteenth 
century  seemed  to  lend  color  to  the  fears  of  Malthus ;  but  for 
well-nigh  a  century  the  concern  in  the  advanced  industrial 
countries  has  been  not  of  an  unduly  rapid  but  of  an  unduly 
slow  increase  of  population,  until  in  France  to-day  it  has 
become  a  problem  not  of  excessive  fecundity  but  of  race 
suicide. 

The  -doctrine  of  over-population  has  therefore  lost  its  ter- 
rors for  modern  society.  The  stress  has  been  shifted  from 
food  to  wealth  and  efficiency.  Productive  efficiency,  however, 
depends  not  only  upon  character  and  education,  intellectual, 
industrial  and  ethical,  but  also  upon  social  organization  and 
economic  methods.  The  problem  of  population,  in  short,  is 
to-day  a  part  of  the  broader  problem  of  the  production  and 
distribution  of  wealth.  In  this  sense  it  is  a  result  rather  than 
a  cause.  If  we  increase  productive  efficiency  and  secure  an 
approach  to  distributive  justice,  population  will  adjust  itself  to 
the  new  conditions  either  by  increasing  automatically  up  to  the 
level  of  comfortable  subsistence  or  by  being  voluntarily  kept 
down  to  that  level. 


66  Economic  Stages.  [§  28 


Book  II. 

Development  of  Economic  Life  and  Thought. 


CHAPTER   V. 
THE  ECONOMIC   STAGES. 

27.   References. 

C.  Biicher,  Industrial  Evolution  (trans,  by  Wickett,  1901),  chs.  i-iii ; 
R.  T.  Ely,  Studies  in  the  Evolution  of  Industrial  Society  (1903),  part  I,  ch. 
iii;  W.  J.  Ashley,  English  Economic  History  (2  vols.,  1888-1893),  passim  ; 
E.  Jenks,  History  of  Politics  (1900),  Types  i,  ii;  W.  Cunningham,  Growth 
of  English  Industry  (3  vols.,  4th  ed.  1905),  passim,  and  Western  Civili- 
zation (1900),  passim;  J.  A.  Hobson,  Evolution  of  Modern  Capitalism 
(1894),  ch.  ii ;  E.  J.  Simcox,  Primitive  Civilizations  (2  vols.,  1897)  ;  O.  F. 
Peschel,  Races  of  Mankind  (1876) ;  F.  Ratzel,  History  of  Mankind  (3 
vols.,  1896-1898) ;  J.  Lubbock,  Races  of  Man  (1888)  ;  and  Origin  of  Civ- 
ilization (1870);  L.  H.  Morgan,  Ancient  Society  (1878);  A.  H.  Keane, 
Man,  Past  and  Present  (1899) ;  Spencer  and  Gillen,  Native  Tribes  of 
Central  Australia  (1899),  and  Northern  Tribes  of  Central  Australia  (1904) ; 
A.  W.  Howitt,  Native  Tribes  of  South  East  Australia  (1904) ;  O.  T.  Mason, 
Origin  of  Invention  (Smithsonian  Institution,  Publications,  1895)  '•>  P-  G-  H. 
Grierson,  The  Silent  Trade  (1903);  A.  Loria",  Economic  Foundations  of 
Society  (trans,  by  Keasbey,  1899) ;  G.  Schmoller,  The  Mercantile  System 
(trans,  by  Ashley,  1896) ;  H.  de  B.  Gibbins,  Industry  in  England  ( 1 897 ) ; 
T.  Warner,  Landmarks  in  English  Industrial  History  (1899). 

28.  Economic  Development. 

Inasmuch  as  economic  life  is  many-sided,  it  is  not  easy  to 
single  out  the  fundamental  characteristics  of  its  development. 
Most  of  the  current  explanations  err  in  one  of  three  ways : 


§  28]  Economic  Development.  67 

some  mistake  the  accident  for  the  essence ;  some  are  so  in- 
complete as  to  be  of  little  real  use  ;  some  are  so  general  as  to 
be  either  vague  or  inadequate. 

(1)  Of  the  first  class  a  good  example  is  the  division  into  the 
three  periods  of  barter,  money  and  credit  economy.     In  the 
first  period  men  exchanged  their  superfluities  through  the  me- 
dium of  barter  alone ;  in  the  second  period  money  was  in- 
vented to  facilitate  trade ;  in  the  third,  credit  was  devised  to 
supplement  the  money  supply.     All  this  is  true  enough,  but 
does  not  go  sufficiently  deep.     It  does  not  show  which  is  cause 
and  which  is  effect.     It  does  not  tell  us  why  these  transitions 
occurred,  nor  explain  the  basic  changes  in  the  industrial  organ- 
ization of  which  these  transitions  are  only  the  outward  forms. 
Of  much  the  same  character  is  the  division  of  economic  life 
into  the  three   stages  of  the  animal,  the  vegetable   and  the 
mineral  economy.     In  the  first  period,  we  are  told,  men  lived 
primarily  on  the  results  of  the  chase  ;   in  the  second,  on  the 
fruits  of  the  earth  ;  while,  in  the  third,  science  is  continually 
expanding  the  scope   of  chemical  substitutes  for  animal  and 
vegetable    food.     It    is    obvious    that    even  if  this  statement 
were  correct,  it  would  not  make  clear  the  fundamental  facts 
of  economic  organization. 

(2)  The  second  class  of  explanations  comprises  all  kinds  of 
half-truths  or  statements  which  while  true  in  themselves  are  in- 
complete.    In  this  category  belong  Maine's  famous  law  that 
the  world  has  progressed  from  a  condition  of  status  to  one  of 
contract,  and  Spencer's  law  of  the  evolution  from  militant  to 
industrial  society.     Of  a  like  nature  is  the  assertion  that  the 
world  has  gone  through   the   stages  of  slavery,  serfdom   and 
free  labor ;  or  that  it  has  advanced  from  common  to  private 
property,  or  from  bimetallism  to  monometallism,  or  from  cus- 
tom to   competition.     All  such  statements  may  be  true  and 
even  serviceable  within  a  limited  field,  but   for  the   purpose 
of  disclosing  the  real  inwardness  of  general  economic  progress 
they  are  of  minor  importance. 

(3)  The  most  conspicuous  illustration  of  the  third  class  of 


68  Economic  Stages.  [§  29 

explanations  is  the  venerable  classification  into  the  five  stages, 
—  the  hunting,  the  pastoral,  the  agricultural,  the  commercial 
and  the  industrial  stage.  This  description,  however,  is  both 
inaccurate  and  vague.  Not  only  is  hunting  not  the  first  stage, 
but  the  sequence  of  the  stages  is  not  necessarily  the  one  men- 
tioned. Moreover,  the  generalization  is  too  broad  to  afford 
much  help  in  the  explanation  of  modern  conditions.  Rome  is 
supposed  to  have  gone  through  these  stages,  and  yet  the  later 
Roman  civilization  differed  in  fundamental  economic  respects 
from  our  own.  A  version  of  economic  history  which  would 
throw  imperial  Rome  and  modern  England  into  the  same 
category  is  manifestly  too  broad  to  be  serviceable.  Of  a 
similar  character  is  the  division  of  economic  life  into  the  stone, 
the  bronze,  the  iron  and  the  steel  age.  The  iron  age  covers 
so  many  heterogeneous  forms  of  economic  civilization  that  the 
classification  is  useful  chiefly  for  archaeological  purposes. 

Before  proceeding,  however,  to  give  the  more  modern  ex- 
planation of  economic  progress,  it  may  be  wise  to  dwell  for  a 
moment  on  the  last  two  classifications  which,  when  correctly 
put,  still  possess  a  certain  use  for  the  early  periods  of  society. 

29.   Primitive  Technique. 

(1)  At  the  outset  and  for  a  long  time,  man,  like  his  simian 
ancestor,  lived  on  wild  berries,  nuts,  roots  and  herbs.     He 
roamed  about,  as  do  some  of  the  Australasians  to-day,  in  small 
groups  of  twenty  to  fifty,  in  alternating  periods  of  plenty  and 
want,  according  to  the  season  or  the  fortunes  of  the  weather. 
Each  group  was  for  the  purposes  of  the  food  supply  entirely 
independent.     Primitive  man,  however,  as  the  physical  confor- 
mation of  his  teeth  and  jaws  shows,  was  not  only  herbivorous 
but  carnivorous.     When  geographical  reasons  favored,  he  varied 
his  diet  by  fishing,  and  in  many  cases  he  practised  cannibalism, 
not  only  on  his  enemies,  but  also  on  the  old  and  useless  mem- 
bers of  his  own  social  group. 

(2)  The  root-grubbing  period  was,  we  shall  not  say  suc- 
ceeded, but    rather    supplemented,  by  the   hunting   stage    in 


§  29]  Primitive  Technique.  69 

certain  portions  of  the  world  where  game  was  abundant.  This, 
however,  presupposes  a  certain  technical  development.  Man 
is  distinguished  from  his  prey  primarily  by  the  use  of  weapons 
and  tools.  The  history  of  civilization  is  very  largely  the  his- 
tory of  technique.  There  was  at  first  no  distinction  between 
weapons  and  tools.  The  weapon  was  the  only  tool  for  both 
defence  and  offence,  The  earliest  weapons  consisted  of  objects 
ready  at  hand,  —  wooden  sticks,  animal  bones,  tusks  and  teeth, 
pieces  of  stone. 

(3)  The  combination  of  these  was  one  of  the  great  steps  in 
advance.     It   changed  the  primitive  club    or    missile    into  a 
moderately  effective  weapon.     The  affixing  of  a  flint  to  a  stick, 
or  the  fastening  of  jagged  teeth  to  pieces  of  wood  by  wisps 
of  grass  or  strips  of  hide  or  catgut  were  the  first  triumph  of 
human  ingenuity.     The  bone    and    the  stone   age  lasted    for 
countless  generations.     In  the  course  of  time  implements  were 
found  serviceable  not  only  for  warfare  but  for  the  saving  of 
toil ;  in  other  words,  by  the  side  of  the  weapon  we  find  the 
tool.     In  this  transition  perhaps  the  mightiest  factor  was  the 
utilization  of  fire.     What  was  a  terror  to  brute  creation  became 
a  servant  to  man.     Originally  obtained  from  a  chance  con- 
flagration, the  spark  of  fire  was  zealously  guarded,  and  was 
soon  invested  with  sacred  attributes.     In  some  cases  it  even 
became   the    basis    of  the    religion  itself.     Although  we  find 
savage  races  to-day  who  understand  the  secret  of  creating  fire 
by  friction,  the  easier  method  was  to  ignite  the  brand  from 
the    ever-burning    flame.     The    chief  function    of  the    vestal 
virgins  in  Rome  was  to  keep  the  perpetual  fire  ;  and  in  the 
Catholic  church  to-day  with  its  never-extinguished   light   we 
have  the  last  survival  of  what  was  once  a  fundamental  social 
custom.1 

(4)  Fire  was  utilized  not  only  for  purposes  of  warmth,  but 

1  The  testimony  given  before  the  New  York  gas  commission  in 
1905  affords  another  curious  illustration  of  the  survival  of  this  custom. 
One  of  the  officials  stated  that  whenever  the  location  of  the  gas  works 
is  changed,  the  fire  is  transferred  by  a  brand  from  the  old  to  the  new 
building.  Under  no  consideration  would  a  new  fire  be  started. 


jo  Econortiic  Stages.  [§  29 

also  for  the  better  preparation  and  conservation  of.  food,  thus 
making  man  less  dependent  on  his  immediate  surroundings. 
From  that  time  on,  although  environment  still  makes  the  man, 
man  to  an  ever-increasing  degree  succeeds  in  changing  the 
environment.  The  most  signal  service  of  fire,  however,  was 
in  the  improvement  of  tools.  Its  uses  became  most  marked 
when  metals  were  employed.  Even  the  tools  of  wood  and 
stone,  however,  were  greatly  improved  thereby.  So  slow  was 
the  development  that  it  took  countless  centuries  for  the  old 
stone  or  palaeolithic  age  to  change  into  the  new  stone  or  neo- 
lithic age.  We  find  flint  weapons  at  least  a  million  years  old. 
During  this  transition  man  had  learned  to  rub,  to  sharpen,  to 
bore,  to  cut,  to  plane  and  to  polish  the  bones  and  stones  so  as 
to  produce  arrows,  knives,  javelins,  hammers,  millstones, 
daggers  and  saws.  In  all  this  he  was  simply  imitating  the  ex- 
perience of  parts  of  his  own  body  :  in  the  saw  we  have  the  im- 
proved tooth,  in  the  hammer  the  strengthened  fist,  in  the 
scoop  the  enlarged  hollow  of  the  hand,  in  the  hook  the  crooked 
finger,  in  the  javelin  the  lengthened  arm,  in  the  knife  the 
sharpened  nail.  Hand  in  hand  with  this  went  the  invention 
of  the  earliest  utensils.  From  the  animal's  horn  to  the  beaker, 
from  the  hollowed  wood  to  the  osier  basket,  from  the  natural 
gourd  to  the  artificial  jug,  does  not  seem  so  great  a  step.  Yet 
the  invention  of  pottery  has  been  deemed  by  some  so  im-. 
portant  as  to  constitute  a  revolution  in  human  civilization. 
Weapons,  tools,  utensils,  —  these  typify  the  onward  march  of 
the  human  race ;  they  are  the  outward  technical  manifesta- 
tion of  man's  intellectual  progress  and  the  physical  basis  of  his 
economic  development. 

(5)  From  the  purely  technical  point  of  view  the  stone  age 
was  succeeded  by  that  of  metal.  Without  the  use  of  fire  for 
smelting  this  would  of  course  have  been  impossible.  Archae- 
ologists not  so  long  ago  thought  that  the  copper  and  bronze 
ages  everywhere  preceded  that  of  iron.  This  can,  however, 
be  accepted  only  with  qualifications.  It  now  seems  probable 
that  the  rougher  forms  of  iron  were  utilized  before  bronze  was 


§  3°]  Transition.  71 

invented.  In  certain  countries  we  find  no  bronze  age  at  all, 
because  of  the  lack  of  one  or  both  of  the  constituent  compo- 
nents, tin  and  copper.  In  the  civilizations  that  grew  up  about 
the  Mediterranean,  however,  first  copper  and  then  bronze 
drove  out  the  primitive  and  rougher  iron  implements,  until 
after  several  centuries  the  improved  extractive  processes 
assured  the  final  victory  to  the  finer  iron  tools  and  thus  insti- 
tuted the  true  iron  age.  With  the  advent  of  this,  man's 
mastery  over  nature  was  definitely  assured. 

30.   Transition  from  the  Lower  Stages  of  Civilization. 

It  is  obvious  that  metallic  weapons  and  implements  would 
be  of  the  greatest  service  to  both  hunters  and  fishers,  and  in 
truth  we  find  some  of  the  more  advanced  hunting  civilizations 
acquainted  with  the  use  of  rougher  iron.  But  the  continuance 
of  the  hunting  stage,  as  well  as  the  character  of  its  transition 
to  a  subsequent  stage,  depends  not  so  much  upon  the  kind  of 
weapon  as  upon  the  conditions  of  nature  and  the  relations  of 
population  to  the  land.  Under  certain  circumstances  where 
game  began  to  become  scarce,  it  was  discovered,  at  first  by 
mere  accident,  that  a  less  precarious  food  supply  could  be 
secured  by  preserving  various  animals  and  caring  for  their 
increase,  rather  than  by  devouring  at  once  the  entire  product 
of  the  chase..  The  domestication  of  animals  was  a  discovery 
of  momentous  import,  and  with  their  multiplication  first  for 
food,  then  for  transport,  and  finally  for  clothing,  protection  and 
pleasure,  we  have  the  conditions  for  the  transition  to  the  pas- 
toral stage.  Although  this  is  often  called  the  nomadic  stage 
because  of  the  perpetual  shifting  of  the  community  in  quest  of 
fresh  pasture,  the  term  is  badly  chosen,  because  there  is  on 
the  whole  less  nomadism  than  in  the  hunting  age.  The  chief 
result  of  the  domestication  of  animals  was  the  assurance  of  a 
permanent,  even  though  an  artificial,  food  supply,  or  at  all 
events  one  that  depended  on  the  foresight  and  care  of  man. 
Cannibalism  disappeared  and  famines  became  less  frequent. 
Another  consequence  was  the  possibility  of  supporting  a  larger 


72  Economic  Stages.  [§  30 

population  on  the  same  area.  Finally,  the  permanent  posses- 
sion of  cattle  became  an  object  of  desire,  and  private  property 
developed  on  a  large  scale,  with  corresponding  differences  of 
wealth  and  of  social  classes. 

It  is,  however,  erroneous  to  assume  that  the  hunter  was  nec- 
essarily succeeded  by  the  herdsman.  In  the  first  place  animals 
capable  of  domestication  were  not  found  everywhere.  On  the 
American  continent  no  pastoral  life  was  possible  with  the  llama 
alone.  Secondly,  whole  stretches  of  land,  both  in  Africa  and 
in  Asia,  were  unsuitable  for  grazing  purposes.  It  is  only  where 
all  the  geographical  and  climatic  conditions  were  favorable,  as 
on  the  great  Asiatic  and  North  African  plains,  that  we  find  the 
transition  to  the  pastoral  age. 

In  the  same  way  it  is  erroneous  to  think  that  the  herdsman 
was  everywhere  succeeded  by  the  farmer.  A  certain  degree 
of  agriculture  is  often  found  combined  with  the  hunting  or 
fishing  stage.  In  fact,  it  is  only  a  small  step  from  the  original 
root-grubbing  to  primitive  agriculture.  When,  again  presum- 
ably by  accident,  it  was  found  that  the  seeds  would  multiply 
themselves,  and  that  the  stick  was  more  effective  for  grubbing 
than  the  finger,  we  have  the  beginning  of  the  cultivation  of 
the  soil.  Just  as  human  foresight  led  men  under  certain  con- 
ditions to  preserve  animals  in  order  to  secure  an  increase,  the 
same  quality  led  them  under  other  conditions  to  preserve 
plants.  If  flock  tending  is  a  result  of  the  domestication  of 
wild  animals,  agriculture  is  a  result  of  the  domestication  of 
wild  plants.  Because  of  the  temporary  patch  near  the  hunter's 
tent,  some,  like  Morgan,  call  this  system  horticulture  ;  because 
of  the  primitive  tools,  others  call  it  hoe  culture.  Both  terms 
are  unfortunate,  the  one  because  horticulture  (/.  e.  garden 
culture)  at  present  signifies  a  very  developed  form  of  tilling 
the  soil ;  the  other,  because  the  hoe  has  even  to-day  been  by 
no  means  completely  superseded  by  the  plough. 

What  is  reasonably  sure  is  that  the  primitive  tilling  of  the 
soil  was  carried  on  by  the  hunters'  wives  and  daughters  as  a 
subordinate  and  auxiliary  means  of  support.  It  was  only  at 


§  30]  Transition.  73 

a  much  later  period  that  agriculture  acquired  more  importance, 
and  it  was  not  until  the  game  supply  had  been  practically  ex- 
hausted that  the  chief  reliance  was  put  on  agriculture,  and  the 
roving  life  of  the  hunter  gave  way  to  the  settled  habitation  of 
the  farmer.  These  periods  in  agriculture  may  exist,  moreover, 
in  connection  not  only  with  the  hunting  stage,  but  also  with 
the  pastoral  stage.  In  fact,  the  most  careful  investigators  now 
believe  that  the  domestication  of  animals  was  not  an  achieve- 
ment of  the  hunter  at  all,  but  of  the  primitive  farmer,  and  that 
the  pastoral  life  was  an  outgrowth  of  early  agriculture.  Without 
a  knowledge  of  all  the  details,  therefore,  it  is  impossible  to 
assert  the  exact  chronological  sequence  of  the  stages. 

Much  the  same  may  be  said  of  the  transition  to  the  later 
stages  of  commerce  and  industry.  The  commercial  stage  does 
not  necessarily  follow  the  agricultural  stage,  but  often  precedes 
it.  In  the  case  of  many  coast  peoples,  the  fishing  and  commer- 
cial stages  appear  at  the  same  time,  without  the  intervention  of 
agriculture.  And  in  more  developed  civilizations,  like  that 
of  Venice,  for  instance,  we  find  the  pastoral  stage  develop  at 
once  into  the  commercial  stage  without  reaching  the  industrial 
stage. 

The  time-honored  classification  of  economic  progress  is  thus 
not  only  inexact  in  itself,  but  of  comparatively  little  service  in 
explaining  the  great  changes  that  have  supervened  since  the 
adoption  of  agriculture.  For  this  purpose  a  somewhat  dif- 
ferent line  of  cleavage  seems  desirable. 

If  we  regard  economic  conditions  from  the  standpoint  of  the 
relations  of  production  to  consumption — for  these  are  the  fun- 
damental economic  facts  —  we  may  divide  the  world's  history 
into  three  great  stages,  known  respectively  as  the  self-sufficing 
economy,  the  trade  or  commercial  economy  and  the  capitalist 
or  industrial  economy.  From  another  point  of  view  these  may 
also  be  called  the  isolated  economy,  the  local  or  village  econ- 
omy and  the  national  economy.  These  we  shall  now  proceed 
to  consider. 


74  Economic  Stages.  [§  31 

31.   Self-sufficing  or  Isolated  Economy. 

By  this  term  is  meant  a  form  of  organization  where  the 
economic  unit  or  household  produces  everything  that  it  needs 
and  consumes  all  that  it  produces.  In  its  typical  form  the 
household  raises  the  raw  materials  for  food  and  for  clothing, 
provides  its  own  shelter  and  works  up  into  finished  products 
everything  necessary  for  its  final  consumption.  What  little 
division  of  labor  exists  takes  place  within  the  household,  and 
grows  only  with  the  expansion  of  the  household's  needs. 
Whether  the  household  is  small  or  large,  however,  it  is  always 
a  unit  by  itself  •  it  has  normally  no  necessary  relations  with 
any  other  unit.  Its  economic  characteristic  is  its  self-suffi- 
ciency and  therefore  its  isolation. 

This  self-sufficing  economy  assumes  many  different  aspects 
in  the  course  of  history.  The  economic  unit  may  be  either 
a  family  or  a  larger  group.  It  may  rest  either  on  slave  labor 
or  on  free  labor.  It  is  the  universal  form  of  the  beginnings 
of  society,  in  the  root-grubbing  or  hunting  stages,  and  is  always 
found  in  the  early  periods  of  the  pastoral  and  agricultural 
stages.  It  is  seen  in  the  frontier  life  of  more  advanced  com- 
munities, for  the.  family  of  the  backwoodsman  in  the  United 
States  is  in  this  respect  like  the  earliest  groups  known  to  his- 
tory. It  is  found  in  Greece,  where  the  landed  estate  was 
called  the  oikos.  It  is  typified  in  the  Roman  familia,  which 
is  the  name  for  the  entire  possessions  of  the  Roman  citizen, 
including  his  wife,  his  children,  his  slaves,  his  land  and  all  his 
other  belongings.  It  is  represented  in  the  manor  of  mediaeval 
Europe  and  in  the  plantation  of  the  American  slaveholder.  It 
is  found  even  to-day  in  the  Russian  mir,  or  village  community, 
and  in  some  of  the  Danubian  principalities. 

Everywhere  the  distinguishing  mark  is  the  self-sufficiency, 
or  home  production  and  home  consumption,  of  the  economic 
unit.  It  is  not  a  question  of  slavery,  for  we  find  the  same 
economic  form  in  the  mediaeval  manor  resting  on  serfdom, 
and  in  the  primitive  or  still  surviving  community  of  freemen. 


§  31]  Isolated  Economy.  75 

It  is  not  a  question  of  autocratic  power,  for  we  find  it  equally 
in  the  democratic  Russian  mir  and  the  aristocratic  American 
plantation.  However  different  the  forms,  the  essence  is  the 
same.  The  landlord,  whether  a  single  person  or  a  group,  is 
the  property  lord.  The  estate  forms  a  complex  whole.  Pro- 
duction is  carried  on  by  the  group,  and  there  is  no  sharp  line 
between  producers  and  consumers.  The  wants  of  the  group 
members  are  satisfied  by  their  own  labor,  and  not  by  that  of 
some  other  economic  unit.  As  consumers  they  are  no  less 
independent  than  as  producers. 

In  the  course  of  time,  indeed,  the  households  that  possess 
natural  or  acquired  advantages  in  the  production  of  certain 
commodities  learn  to  raise  a  surplus,  and  trade  it  off  to  other 
groups  for  various  purposes,  —  at  first  propitiatory  in  character, 
but  later  in  the  expectation  of  securing  similar  advantages  in 
return.  In  this  way  barter  develops.  But  at  the  outset,  and  for 
a  long  time,  there  is  no  barter,  because  in  a  typical,  self-sufficing 
economy  there  is  no  need  of  barter.  In  fact,  the  exchange  of 
commodities  seems  wrong  because  it  is  unnatural.  The  pro- 
pensity to  "  truck,"  which  Adam  Smith  considered  natural  to 
man,  is  in  reality  the  outcome  of  a  long  evolution.  To  truck 
is  etymologically  to  trick,  just  as  barter  in  its  original  form 
(old  French  bareter}  means  to  cheat.1  Even  when  exchanges 
develop,  the  transactions  are  always  attended  by  rigid  formali- 
ties, often  invested  with  a  religious  sanction. 

The  fact  of  exchange  between  the  groups  does  not  neces- 
sarily alter  the  organization  of  economic  life,  as  long  as  the 
great  mass  of  commodities  are  produced  and  consumed  at  home. 
Thus,  for  instance,  we  find  in  the  later  centuries  of  Greek  life 
that  many  of  the  estates  produced  raw  materials,  and  sometimes 
luxuries,  to  be  sold  in  the  cities  which  enjoyed  an  active  com- 
mercial life.  So  in  Rome  during  the  period  of  its  greatest  pros- 
perity, the  large  estates  devoted  themselves  to  some  one  product, 

1  This  meaning  has  survived  in  our  "barrator,"  although  by  a  curious 
development  it  is  now  confined  to  the  deceitful  shipmaster,  or  to  the 
cheating  and  meddlesome  instigator  of  litigation. 


76  Economic  Stages.  [§  32 

like  wine  or  oil  or  wheat  for  export,  which  was  carried  on  by 
large  trading  companies.  So,  again,  in  the  American  plantation 
a  single  commodity,  like  tobacco  or  cotton  or  sugar,  raised  for 
export  and  handled  in  the  towns,  generally  constituted  the  very 
foundation  of  its  success.  It  is  still  true,  however,  that  even 
in  these  cases  the  great  mass  of  commodities  used  at  home 
was  produced  at  home.  While  there  was  trade  between  the 
units,  there  was  little  if  any  trade  within  the  units,  and  while 
exchanges  in  the  bulk  even  as  between  the  units  amounted  to 
a  large  sum,  they  played  a  small  role  in  the  daily  life  of  each 
household.  Just  as  the  plantation  and  not  the  towns  gave  the 
imprint  to  the  civilization  of  the  South,  so  the  mir  and  not  the 
cities  typify  the  Russian  economic  life,  so  the  estates  and  not 
the  commercial  companies  shaped  the  history  of  republican 
Rome.  In  its  essence  the  economic  unit  was  still  predomi- 
nantly self-sufficing.  Even  where  there  is  a  surplus  produc- 
tion for  the  market,  the  consumers  within  the  group  are  in 
an  overwhelming  degree  dependent  on  the  exertions  of  the 
group. 

With  the  growth  of  commercial  intercourse  both  within  and 
between  those  early  economic  groups,  the  self-sufficing  char- 
acter of  the  unit  begins  to  disappear,  and  there  is  gradually 
ushered  in  the  next  stage  of  economic  life. 

32.   Trade  or  Commercial  Economy. 

The  characteristic  feature  of  this  stage  is  the  fact  that  pro- 
duction is  no  longer  followed  directly  by  consumption,  but  that 
there  is  interposed  the  process  of  exchange.  The  demand  of 
consumers  is  now  met  primarily  through  the  medium  of  trade  or 
commerce.  The  significance  of  trade  does  not  arise  from  the 
fact  that  there  is  trade  between  the  units,  for,  as  we  have  just 
seen,  we  find  such  trade  in  the  later  stages  of  the  isolated  or 
household  economy.  But  we  now  have  trade  within  the  unit. 
The  members  of  the  household  no  longer,  as  before,  produce 
what  they  need,  but  primarily  produce  what  others  need.  We 
now  have  separate  classes  of  producers  and  separate  classes 


§  32]  Commercial  Economy.  77 

of  consumers.  Men  for  the  most  part  no  longer  consume  their 
own  products,  but  the  products  of  others  which  they  secure 
through  trade.  In  other  words,  instead  of  the  self-sufficing 
economy  we  have  the  trade  or  commercial  economy. 

The  unit  of  economic  life,  although  broader  than  before, 
still  remains  local  in  character,  and  the  trade  and  industry  are 
largely  centred  in  the  villages.  Hence  we  also  speak  of  it  as 
the  local  or  village  economy.  We  can  study  this  stage  most 
clearly  in  mediaeval  history.  The  eleventh  and  twelfth  cen- 
turies witnessed  an  immense  impetus  given  to  commerce,  due 
chiefly  to  the  opening  of  new  routes  by  the  Crusades.  The 
markets  and  fairs  which  had  begun  on  a  small  scale  in  the  pre- 
ceding centuries  now  became  the  rule,  and  soon  assumed  a 
more  permanent  form  in  the  shape  of  villages  and  towns.  The 
mediaeval  town  was  shut  off  from  its  neighbors  not  only  by  the 
actual  wall  of  stone  and  mortar,  but  by  the  no  less  important 
economic  barrier  of  trade  monopoly ;  only  the  townsman,  the 
burgess,  might  freely  buy  or  sell ;  only  he  was  admitted  to  the 
many  trade  privileges.  On  the  basis  of  this  economic  separa- 
tion was  built  up  the  political  independence  which  is  so  marked 
a  characteristic  of  early  communal  life.  Although  we  call 
it  the  village  economy,  it  is  evident  that  the  economic  unit 
was  not  the  village  or  town  itself,  but  the  village  with  the 
outlying  territory.  The  lands  or  estates  provided  the  raw 
materials  which  were  worked  up  into  finished  products  within 
the  town. 

The  breaking  up  of  the  older  unit,  moreover,  enhanced  the 
importance  of  industry.  In  the  preceding  stage  industry  was 
scarcely  differentiated  from  agriculture.  The  farmer  was  his 
own  carpenter,  the  farmer's  wife  did  the  haying  and  made  the 
family  clothes.  Even  where  the  estates  became  so  large  that 
there  were  separate  classes  of  industrial  workers,  they  were  all 
under  the  control  of  the  landowner.  Now,  however,  the 
village  workmen  began  to  form  an  independent  class,  even 
though  many  of  the  workmen  might  have  a  little  garden  patch 
of  their  own.  The  point  is  that  they  no  longer  raised  the  raw 


78  Economic  Stages.  [§  32 

material  for  industry,  but  bought  it.  The  farmers  grew  the 
material,  the  village  artisans  turned  out  the  product  and  each 
class  progressed  by  trading  with  the  other. 

The  new  industry  was  based  on  trade  in  another  sense. 
The  artisan  not  only  bought  the  raw  material  in  small  quan- 
tities, but  sold  in  his  shop  or  in  his  booth  at  the  fair  the 
products  which  he  himself  had  finished.  The  workman  was 
primarily  a  trader,  and  his  success  depended  as  much  on  his 
shrewdness  in  trade  as  on  his  skill  in  industry.  It  was  only 
by  degrees  that  the  artisans  pure  and  simple  became  a  sep- 
arate class  and  that  trade  was  carried  on  by  the  large  mer- 
chants. For  a  long  time  business  was  chiefly  of  a  retail 
character  conducted  in  the  local  markets  and  fairs,  and  even 
when  the  scale  of  transactions  in  a  few  staple  articles  reached 
the  stage  of  wholesale  trade,  the  modern  machinery  of  com- 
merce was  entirely  lacking. 

The  increasing  importance  of  the  trader  and  the  workman  was 
the  chief  cause  of  the  growing  sense  of  liberty  and  equality ; 
the  mediaeval  town  was  the  birthplace  of  modern  democracy. 
It  took  a  long  time,  however,  for  industry  and  trade  to  attain 
a  dominant  position.  After  some  temporary  victories  in  Italy, 
the  trade  centres  won  their  first  lasting  triumph  in  the  Low 
Countries,  and  it  is  accordingly  there  that  we  find  the  earliest 
example  of  modern  republics  on  a  large  scale. 

In  the  later  development  of  this  economic  stage  there  were 
indeed  great  accumulations  of  wealth  gained  in  commerce  or 
wholesale  trade  side  by  side  with  the  wealth  in  land.  We  have 
not  only  the  feudal  landlords  but  the  merchant  princes.  If  we 
choose  to  apply  the  modern  term  capital  to  such  accumula- 
tions, we  find  agricultural  capital  and  commercial  capital,  but 
with  rare  exceptions  no  industrial  capital.  The  wealth  drawn 
from  the  land  was  under  prevailing  conditions  not  again  put 
into  the  land,  but  consumed  by  the  landowners ;  the  wealth 
accumulated  in  trade  could  not  go  on  indefinitely  multiplying 
ships  and  vans  without  increasing  the  commodities  to  be  trans- 
ported ;  but  since  these  commodities  were  produced  by  hand, 


§  32]  Commercial  Economy.  79 

the  increase  was  slow.  In  last  analysis,  therefore,  the  economic 
civilization  of  this  stage  rested  upon  the  petty  village  industry. 
Commercial  prosperity  and  agricultural  wealth  were  still  as- 
sociated with  the  prevalence  of  the  small  workman  and  the 
village  economy. 

This  stage,  it  is  true,  assumes  different  'phases.  In  some 
places  agricultural  prosperity  predominated  and  the  landowner 
was  supreme ;  in  others,  like  the  Hansa  towns,  we  find  busy 
marts  of  wholesale  trade,  and  the  predominance  of  the  aristo- 
cratic commercial  families ;  in  still  others  we  find  the  centres 
of  manufacture  and  the  political  mastery  of  the  craft  guilds. 
In  all  cases,  however,  we  have  the  typical  characteristics,  —  the 
small  trader,  the  petty  workman  and  the  local  economy.  The 
large  landowner  sold  his  produce  in  the  neighboring  village 
market  and  drew  thence  his  articles  of  consumption,  outside 
of  simple  food.  The  merchant  prince  may  have  traded  with 
distant  lands,  but  the  great  bulk  of  the  transactions  was  local, 
and  the  business  of  the  national  and  international  fairs  was 
restricted  to  comparatively  few  articles.  Most  of  what  the 
workman  produced  was  made  to  order  for  the  local  market. 
The  village  or  town  was  the  unit ;  the  foreigner  was  the  man 
who  came  from  a  different  town,  not  necessarily  from  a  different 
country. 

This  stage  of  economic  life  lasted  in  Europe  for  several 
centuries.  Various  causes  conspired  first  to  modify  and  finally 
to  destroy  it.  The  chief  factor  was  undoubtedly  the  accumu- 
lation of  wealth  caused  by  the  discovery  of  the  new  world 
and  the  opening  up  of  the  all-sea  trade  routes  to  the  East. 
The  discovery  of  immense  sums  of  precious  metal  in  America 
and  the  prodigious  impetus  given  to  commerce  both  East  and 
West  produced  a  heaping  up  of  riches  which  were  now  applied 
on  a  large  scale  to  further  production  in  industry,  and  which 
gradually  changed  the  character  of  all  economic  life.  This 
accumulation  of  wealth,  applied  to  industry,  formed  what  came 
to  be  known  as  industrial  capital,  and  there  was  thus  ushered 
in  the  third  stage. 


8o  Economic  Stages.  [§  33 

33.  Capitalist  or  Industrial  Economy. 

The  characteristic  feature  of  this  stage  is  the  appearance  of 
capital  on  a  large  scale,  applied  in  industry.  With  capital, 
there  naturally  came  the  capitalist,  the  owner  of  the  capital, 
the  employer  of  'labor  force  and  the  director  of  industrial 
enterprise.  In  the  isolated  stage  we  noticed  a  unity  pervading 
the  whole  economic  process ;  in  the  local  and  handicraft  stage 
we  saw  that  the  unity  was  confined  to  production  ;  in  the  capi- 
talist stage  production  itself  is  split  up.  At  first,  as  in  seven- 
teenth and  early  eighteenth-century  England,  the  capitalist 
makes  his  appearance  at  the  beginning  or  end  of  the  productive 
process :  he  buys  the  raw  material  at  wholesale,  or  perhaps 
even  disposes  of  the  finished  product  at  wholesale,  leaving  the 
remainder  of  the  process  in  the  hands  of  the  independent 
workman.  Somewhat  later  the  capitalist  acquires  the  working 
premises  and  finally  the  technical  means  of  production.  The 
workshop  becomes  the  factory,  the  tools  are  replaced  by 
machines,  and  the  workman  becomes  the  factory  hand.  In 
the  meantime  the  various  parts  cf  the  process  become  so 
important  that  each  separate  stage  falls  into  the  hands  of 
distinct  groups  of  capitalists,  each  of  them  resting  on  the 
fundamental  class  of  factory  owners.  Thus  the  supply  of  raw 
material,  the  provision  of  plant  and  factory,  as  well  as  the 
getting  of  the  finished  product  to  the  consumer,  call  into 
existence  distinct  classes  of  capitalists  for  each  step  in  the 
process.  Finally  the  power  of  capital  becomes  so  enormous 
that  in  some  industries  we  find  a  movement  toward  integration, 
and  the  same  capitalists,  now  associated  into  a  single  group, 
gradually  acquire  control  of  the  entire  process,  from  the  ex- 
traction of  the  raw  material  to  the  ultimate  disposition  of  the 
finished  product  to  the  consumer.  Thus  industrial  society 
comes  to  be  organized  on  its  present  complicated  basis. 

Production  is  now  no  longer  to  order  in  small  quantities,  as 
in  the  previous  economic  stage,  but  large  stocks  are  accumulated 
to  be  disposed  of  when  the  market  is  favorable,  or  large  plants 


§33]  Industrial  Economy.  81 

are  erected  to  fill  anticipated  large  orders.  The  leisurely 
methods  of  the  old  system,  regulated  more  or  less  by  custom, 
give  way  to  an  intense  competition  which  makes  itself  felt  in 
every  nook  and  corner  of  industrial  society.  The  last  vestige 
of  barter  transaction  disappears,  and  money  everywhere  forms 
the  link  between  exchanges.  Credit  outgrows  its  primitive 
forms  of  mere  personal  assistance  and  becomes  an  integral  part 
of  production  and  exchange.  The  desire  to  employ  capital 
lucratively  leads  to  the  attempt  to  economize  labor  force,  and 
brings  about  the  invention  of  new  machinery.  The  prodigious 
cheapening  of  production  converts  luxuries  into  necessities 
and  widens  the  consuming  power  of  the  people.  The  multi- 
plication of  wants  brings  new  industries  into  existence,  and 
finally  gives  more  employment  at  increasing  wages  to  the  laborer. 
At  the  same  time  the  enormous  power  of  capital  and  the 
separation  of  society  into  industrial  classes  create  new  and 
difficult  problems. 

An  important  result  of  the  capitalist  stage  is  the  supplanting 
of  the  local  unit  by  the  nation.  Production  and  consumption 
no  longer  take  place  within  the  local  boundaries,  but  what  is 
produced  in  one  district  is  often  consumed  in  another.  The 
local  economy  broadens  into  a  national  economy.  The  larger 
economic  interests  now  require  protection  through  the  forma- 
tion of  broader  and  stronger  political  units.  Thus  the  petty 
feudal  principalities  disappear  and  the  modern  national  states 
are  born.  Town  is  no  longer  arrayed  against  town,  the  free- 
man or  burgess  gives  way  to  the  citizen  of  the  state ;  the 
foreigner  is  now  the  man  from  a  different  nation,  not  from  a 
different  village.  In  the  early  stages  of  capitalistic  develop- 
ment the  nations  oppose  each  other  as  the  towns  had  previ- 
ously done,  and  this  keen  national  competition  leads  to  much 
good,  although  not  unmixed  with  evil. 

More  recently  still,  the  further  application  of  capitalist  meth- 
ods, the  improvements  in  transportation  and  communication, 
coupled  with  the  growth  of  modern  speculation,  tend  to  pro- 
duce a  world  market  for  most  products,  and  the  perturbations 

6 


8  2  Economic  Stages.  [§  33 

of  trade  are  quickly  transmitted  from  country  to  country.  We 
might  thus  even  be  tempted  to  speak  of  an  international 
rather  than  a  national  economy.  But  although  the  signs  are 
not  wanting  that  the  ultimate  outcome  will  be  the  creation  of 
such  a  world  economy,  it  must  not  be  overlooked  that  the 
economic  unit  to-day  is  still  the  nation,  and  that  the  national 
standpoint  is  being  only  slowly  transformed  by  universal  or 
international  considerations. 

The  capitalist  stage  is  also  called  the  industrial  stage,  because 
industry  in  the  narrower  sense  is  the  chief  occupation.  In 
the  first  stage  agriculture  was  the  well-nigh  exclusive  form,  in 
the  second  stage  prosperity  rested  largely  on  trade,  in  this 
stage  agriculture  and  trade  alike  step  into  the  background. 
All  products  of  course  still  come  ultimately  from  the  soil ;  but 
an  ever-increasing  quantity  of  wealth  consists  of  products 
several  degrees  removed  from  the  soil.  Production  of  wealth 
to-day  means  more  and  more  the  creation  of  finished  products. 
Commerce,  again,  is  still  of  great  importance ;  but  commerce 
is  now  primarily  the  handmaid  to  industry  rather  than  to  agri- 
culture. Not  only  has  the  moneyed  interest  appeared  as  a  rival 
of  the  landed  interest,  but  the  moneyed  interest  itself  has 
become  intimately  bound  up  with  industry.  The  great  fortunes 
are  gained  to-day  not  in  agriculture,  nor  even  in  commerce,  but 
in  industry.  The  typical  rich  man  in  the  first  economic  stage 
is  represented  by  the  feudal  landlord  or  the  plantation  owner ; 
in  the  second  stage  by  the  merchant  princes,  such  as  the  Medici 
and  the  Fugger ;  in  the  third  stage  by  the  Carnegies  and  the 
Rockefellers.  Agriculture  and  commerce  have  been  trans- 
formed by  the  application  of  capital  and  of  machine  methods. 
The  most  prosperous  condition  and  the  widest  diffusion  of 
power,  of  culture  and  of  civilization  are  found  in  industrial 
rather  than  in  agricultural  nations. 

Some  countries,  like  China,  were  not  touched  by  this  move- 
ment, because  of  the  policy  of  commercial  exclusion.  So  that 
China  is  still  in  the  village  economy  stage.  Other  countries, 
like  Japan,  were  brought  into  the  new  movement  but  a  few 


§33]  Industrial  Economy.  83 

decades  ago,  and  are  now  in  a  process  of  rapid  transition. 
Still  other  places,  like  some  of  the  backward  sections  of 
Europe  and  America,  lag  behind  in  the  movement.  In  classic 
antiquity,  as  we  have  seen,  the  second  stage  was  not  reached 
for  a  long  time.  Even,  however,  where  commerce  developed 
on  a  large  scale  and  the  civic  centres  flourished,  industry  was 
still  of  a  petty,  handicraft  character,  and  the  existence  of 
slavery  coupled  with  the  absence  of  any  such  revolution  in 
the  world's  trade  as  occurred  at  the  close  of  the  middle  ages 
prevented  both  Greece  and  Rome  from  entering  upon  the 
later  stages  of  the  capitalistic  era.  Capital  in  classic  antiquity 
was  primarily  commercial  capital ;  capital  in  modern  times  is 
predominantly  industrial  capital. 


CHAPTER  VI. 
THE  HISTORICAL  FORMS  OF  BUSINESS  ENTERPRISE. 

34.  References. 

C.  Biicher,  Industrial  Evolution  (1901),  ch.  iv  ;  Ashley  and  Cunningham 
(as  in  §  27) ;  T.  Veblen,  Theory  of  Business  Enterprise  (1904),  chs.  ii,  iii ; 
J.  A.  Hobson,  Evolution  of  Modern  Capitalism  (1894),  chs.  iii,  iv ;  G.  E. 
Howard,  History  of  Matrimonial  Institutions  (3  vols ,  1904),  I,  chs.  i-iv ; 
H.  S.  Maine,  Ancient  Law  (1880),  ch.  ix;  and  Early  History  of  Institu- 
tions (1880),  ch.  iii ;  C.  Gross,  The  Gild  Merchant  (1890) ;  A.  S.  Green, 
Town  Life  in  the  Fifteenth  Century  (1895)  ;  W.  A.  S.  He  wins,  English 
Trade  and  Finance  chiefly  in  the  Seventeenth  Century  (1892) ;  A.  Toynbee, 
The  Industrial  Revolution  (1884)  ;  G.  Unwin,  Industrial  Organization  in 
the  Sixteenth  and  Seventeenth  Centuries  (1904);  Cooke-Taylor,  The 
Modern  Factory  System  (1891)  ;  S.  J.  Chapman,  The  Lancashire  Cotton 
Industry  (1904). 

35.   Primitive  Economic  Activity  — The  Clan. 

Business  originally  meant  the  "  being  busy  "  for  a  mere  live- 
lihood ;  it  now  means  being  busy  for  profit.  In  the  same  way 
business  enterprise  originally  denoted  any  organized  form  of 
economic  activity ;  it  has  now  come  to  involve  the  idea  of 
making  a  profit  or  securing  a  surplus.  "  Enterprise  "  is  the 
Romanic  form  of  the  Teutonic  "  undertaking."  When  we 
undertake  to  secure  any  form  of  wealth,  we  have  economic 
activity;  when  we  undertake  to  secure  profits  through  some 
organized  activity,  we  have  an  undertaking  or  enterprise. 

With  the  immense  growth  of  such  activities  in  modern  times 
increased  importance  is  attached  to  the  organizer.  Not  so 
long  ago  we  called  the  head  of  the  undertaking  the  "  under- 
taker " ;  nowadays  with  the  restriction  of  the  term  to  a  par- 
ticular class  of  undertakings  we  have  come  to  call  him  the 
head  of  the  enterprise,  or  the  entrepreneur. 

84 


§  35]  The  Clan.  85 

The  earliest  kinds  of  business  undertakings  are  outgrowths 
of  the  family.  The  family  itself,  however,  is  the  result  of  a 
long  evolution.  We  have  seen  that  our  savage  ancestors 
roamed  about  in  small  hordes  or  packs  of  a  few  dozen  individ- 
uals, the  numbers  being  dependent  chiefly  on  the  possibility  of 
securing  available  food  supplies  from  the  berries  and  nuts,  the 
chase  and  the  waters.  After  the  breakdown  of  the  original 
monopoly  of  sexual  relations  on  the  part  of  the  leader  of  the 
pack,  the  ensuing  promiscuous  methods  of  pairing  gradually 
gave  way  to  more  or  less  permanent  forms  of  marriage,  in 
which  kinship  was  counted  through  the  mother.  For  amid 
such  conditions  of  group,  rather  than  individual,  marriage  re- 
lations it  was  indeed  a  wise  child  who  knew  its  own  father. 
These  consanguine  groups  or  collections  of  hordes  which  we 
meet  almost  everywhere  at  the  dawn  of  history  are  known  as 
clans  (or,  to  use  the  Roman  term,  gen fes),  and,  from  the  fact 
that  their  members  usually  trace  their  kinship  through  the 
mother,  are  called  uterine  or  maternal  clans.  In  some  cases 
where  the  primitive  agriculture  or  hoe-culture  carried  on  by 
the  women  assumed  great  proportions,  or  where  we  find  an  in- 
creasing significance  attached  to  the  domestic  arts,  like  weaving 
and  baking,  the  social  importance  of  the  female  was  reinforced 
by  still  stronger  economic  reasons,  and  we  encounter  a  system 
of  society  known  as  the  matriarchate,  —  the  government  by 
women.  While  the  matriarchal  system,  however,  is  occasional, 
the  maternal  society  based  on  the  uterine  clan  is  well-nigh 
universal. 

Of  the  characteristics  of  this  early  gentile  or  clan  society 
there  is  room  to  say  only  a  few  words.  Of  a  family  in  the 
modern  sense  there  was  no  trace,  further  than  the  temporary 
living  together  of  the  mother  and  the  very  young  children. 
The  only  recognized  relationship  was  kinship  or  membership 
in  the  clan.  Owing  in  a  large  measure  to  the  survival  of  the 
primal  law  of  sexual  monopoly  of  the  head  of  the  original 
horde,  and  perhaps  also  to  a  recognition  of  the  injurious  re- 
sults of  inbreeding,  the  custom  arose  of  contracting  marriage, 


86  Historical  Forms  of  Business.         [§  36 

or  rather  of  entering  into  connubial  relations,  outside  of  the 
clan ;  and  thus  there  developed  one  of  the  most  rigid  rules  of 
primitive  society,  the  system  of  exogamy,  or  the  prohibition  of 
marriage  between  members  of  the  same  clan,  as  constituting 
incest.  Each  clan  traced  its  descent  from,  and  often  took  the 
name  of,  some  mythical  ancestor,  —  generally  an  animal  or 
plant.  This  totem,  as  it  was  called,  became  sacred  and  was 
soon  protected  by  a  system  of  "  taboo  "  or  religious  prohibi- 
tion. The  origin  of  the  totem  worship  is  still  shrouded  in 
mystery,  but  is  probably  to  be  sought  in  economic  reasons,  — 
the  totem  being  at  first  the  chief  source  of  food  supply  which 
afterwards  became  so  useful  for  purposes  of  barter  that  its  con- 
sumption by  members  of  the  clan  was  forbidden.  Where 
conditions  were  favorable  to  an  increase  of  population  the 
clans,  although  always  preserving  their  own  integrity,  developed 
into  the  wider  groups  of  phratries  and  of  tribes,  all  of  them 
connected,  however  remotely,  by  blood  relationship.  The 
clans,  and  in  some  cases  the  tribal  groups,  were  the  centres  for 
common  sports,  celebrations  and  worship,  and  in  the  clan  or 
tribal  customs  we  find  the  germ  of  what  afterwards  developed 
into  both  law  and  morals. 

36.  The  Family. 

The  decay  of  the  clan  or  gentile  society  was  again  due 
largely  to  economic  causes.  Where  conditions  favored  the 
growth  of  the  pastoral  system,  private  property  in  flocks  and 
herds  arose,  and  the  paramount  position  of  the  father  as  the 
bread-winner  and  the  defender  of  the  property  was  recognized. 
Where  the  hunting  and  root-grubbing  stage  was  supplanted  by 
a  developed  agriculture,  the  labor  of  the  man  in  tilling  the  soil, 
constructing  the  house  and  maintaining  the  patrimony  became 
of  signal  importance.  The  male  is  now  the  chief  factor  in 
the  economic  process,  and  we  accordingly  find  the  patriarchal 
family.  Famulus  is  the  Latin  for  servant  or  slave  :  all  the 
members  of  the  new  family  group  are  the  servants  of  the  father. 
The  family  relations  are  primarily  property  relations.  The 


§  36]  The  Family.  87 

father  owns  the  land,  the  flocks,  the  wife  or  wives,  the  children, 
the  slaves,  and  exercises  scarcely  less  authority  over  the  other 
relatives  that  form  a  part  of  the  family  group.  The  father  gives 
his  name  to  the  wife  and  children,  and  the  patrimony  is  handed 
down  from  family  head  to  family  head.  We  now  find  that  mar- 
riage by  capture  gives  way  to  marriage  by  purchase ;  and  the 
group  union  of  early  gentile  society  is  succeeded  by  the  polyg- 
amy and  finally  the  monogamy  of  the  patriarchal  head.  The 
unity  of  this  new  family  group  is  far  closer  and  its  discipline 
far  more  rigorous  than  that  of  the  clan,  and  the  recognition  of 
these  intimate  economic  relations  leads  to  the  growth  of  all 
those  finer  filial  and  fraternal  ties  which  are  the  nursery  of  ethical 
progress.  For  a  time  the  forms  of  the  old  gentile  society  are 
still  preserved  amid  the  newer  and  more  vigorous  patriarchal 
system,  either  under  an  agricultural  regime,  as  in  the  recorded 
beginnings  of  Greek  and  Roman  history,  or  under  pastoral 
conditions,  as  in  the  story  of  the  early  biblical  patriarchs.  But 
with  the  undermining  of  the  economic  foundations  of  the 
clan  system  the  whole  structure  of  gentile  society  crumbled. 
Wherever  territorial  relations  based  on  the  community  of 
wider  economic  interests  replaced  the  old  ties  of  blood  re- 
lationship within  the  clan,  tribal  society  developed  into  po- 
litical society  and  thus  led  to  the  origin  of  the  state  and  of 
organized  government. 

In  Judaea,  Greece  and  Rome,  as  in  all  countries  that  had 
to  work  out  their  own  civilization,  this  gradual  evolution  can 
be  clearly  discerned.  In  other  cases  where  a  lower  civilization 
was  suddenly  brought  into  contact  with  a  higher  one,  the  steps 
are  often  less  gradual.  Thus  the  contact  of  the  Teutonic 
tribes  with  Rome  engendered  a  rapid  transition  from  gentile 
to  political  society,  but  with  a  decided  abbreviation  of  the 
patriarchal  period.  Much  the  same  is  true  of  the  influence 
of  the  English  on  the  Irish  septs,  which  lasted  well  into  the 
middle  ages,  and  on  the  Scottish  clans,  which  finally  disap- 
peared as  a  power  only  a  century  or  two  ago. 

The    patriarchal    family   was    thus    primarily  an    economic 


88          Historical  Forms  of  Business.  [§  36 

product.  The  family  became  and  remained  the  basis  of  social 
and  political  life.  With  the  growth  of  industry  and  commerce 
and  the  opportunity  for  independent  activity  on  the  part  of 
the  various  members,  the  old  family  group  split  up  and  was 
contracted  into  the  family  of  modern  times  with  its  smaller 
and  more  immediate  circle.  Finally,  the  most  recent  develop- 
ment of  economic  life  with  its  freedom  and  its  system  of 
competition  has  powerfully  contributed  to  a  still  further  loosen- 
ing of  the  family  discipline ;  woman  has  emancipated  herself, 
divorce  has  become  frequent,  the  age  of  the  effective  inde- 
pendence of  the  children  has  been  continually  pushed  further 
back.  Thus  there  have  been  ushered  in  all  the  ethical  and 
social  problems  of  modern  family  life,  a  discussion  of  which 
transcends  the  scope  of  an  economic  treatise. 

The  family  thus  constitutes  the  earliest  form  of  business 
undertaking  only  in  the  original  sense  of  an  organization  to 
secure  a  competence  rather  than  a  surplus.  That  is  to  say, 
production  was  carried  on  within  the  family,  by  the  family,  for 
the  family ;  both  producers  and  consumers  were  members  of 
the  family ;  each  worked  for  all ;  each  consumed  the  products 
of  all.  Yet  the  first  attempts  at  business  enterprise  in  the 
modern  sense  of  an  organization  for  gain,  of  producing  for  a 
market,  are  associated  with  the  later  developments  of  the 
family  groups.  The  great  slave  plantations  of  the  Roman 
Republic,  for  instance,  were  distinct  business  enterprises.  The 
larger  family  groups  which  became  the  village  communities  of 
the  early  middle  ages  and  which,  when  subjected  to  an  over- 
lord, developed  into  the  manorial  system  were  occasionally,  at 
least  in  part,  business  enterprises,  as  in  England  after  the 
period  of  the  early  enclosures.  We  find  examples  of  this 
co-operative  family  or  group  enterprise  not  only  in  agriculture, 
but  also  in  commerce,  as  in  the  trade  transactions  of  the 
mediaeval  communes,  and  even  in  industry,  as  in  the  Russian 
artels  or  co-operative  groups  of  laborers  that  have  survived 
to  this  day.  In  its  essence,  however,  the  family  was  not  well 
fitted  for  business,  in  the  sense  of  profit-making ;  and  with  the 


§  37]  Help  or  Hire  System.  89 

increasing  importance  of  the  competitive  life  the  abler  in- 
dividuals who  cut  themselves  loose  from  the  family  group 
forged  to  the  front.  With  the  greater  conservatism  which 
always  marks  the  tillers  of  the  soil  we  find  this  process  slower 
in  agriculture  than  in  industry  and  commerce.  It  is  accord- 
ingly in  these  latter  directions  that  we  must  first  look  for  the 
more  developed  forms  of  business  enterprise. 

37.  Help  or  Hire  System. 

Where  industry  develops  beyond  the  capacity  of  the  family 
group  and  where  the  conditions  are  not  favorable  to  the  growth 
of  slavery,  we  find  the  beginnings  of  industrial  assistance  from 
outside  sources.  The  independent  laborer  who  roves  from 
house  to  house  and  from  place  to  place  does  more  of  the 
work  of  the  household.  Carpenters,  cobblers,  glaziers,  tin- 
smiths, masons,  seamstresses,  —  these  represent  a  few  of  the 
occupations  conducted  in  this  roving  fashion.  The  itinerant 
workman  receives  a  compensation  for  his  services  and  often 
becomes  for  the  time  being  a  member  of  the  family.  This 
custom  survives  even  to-day,  not  only  in  the  New  England 
institution  which  bears  the  significant  name  of  "  help."  (even 
though  the  service  has  become  somewhat  more  permanent), 
but  also  in  the  temporary  assistance  given  to  our  Western 
farmers  at  harvest  time  by  the  "  hired  man."  This  system 
can  thus  best  be  termed  the  help  or  hire  system.1  It  is  found 
in  the  early  history  of  almost  every  society,  and  those  familiar 
with  the  rural  communities  of  Switzerland  and  Scandinavia 
will  recognize  it  as  the  prevalent  form  to-day. 

In  its  essence,  however,  the  help  system  is  an  intermediate 
and  transitional  form.  The  important  factor  is  still  the  family 
group ;  the  consumer  furnishes  as  before  the  raw  materials 
and  receives  in  return  the  finished  product,  the  workman  sup- 
plying the  labor  force  and  sometimes  the  tools.  Gradually 

1  The  term  "  wage-work,"  used  by  Biicher  and  his  translator,  Industrial 
Evolution,  p.  162,  is  ill  chosen,  because  the  term  wage-earner  inevitably 
brings  to  mind  the  modern  factory  system. 


90  Historical  Forms  of  Business.          [§  38 

the  change  assumes  a  more  rapid  pace.  The  smaller  house- 
holds find  that  they  need  outside  help  more  frequently  but  less 
intensively,  and  the  larger  family  groups  find  it  profitable  to 
set  some  of  their  superfluous  assistants  to  work  for  others. 
The  custom  arises  of  the  consumer  going  to  the  workman 
rather  than  the  workman  coming  to  the  consumer.  Thus  the 
occupations  of  the  village  blacksmith,  the  miller,  and  even  the 
baker  and  weaver  become  settled  trades.  The  itinerant  work- 
man acquires  greater  permanence,  and  from  assistants  the 
laborers  now  evolve  into  a  class  independent  of  the  family 
group.  When  this  step  is  reached,  we  have  what  is  known  as 
the  handicraft  system. 

38.   Handicraft  System. 

Under  this  system  the  artisan  is  independent.  He  no 
longer  works  in  the  house  of  the  consumer.  He  occupies 
his  own  house,  he  goes  to  market  to  purchase  his  raw  mate- 
rials, he  works  up  the  raw  material  in  his  own  home  with  his 
own  tools  and  he  sells  the  finished  product  to  the  consumer. 
in  his  own  shop.  We  no  longer  have  production  for  the 
family,  as  in  the  family  system ;  we  no  longer  have  the  raw 
material  and  the  finished  product  belonging  to  the  consumer, 
as  in  the  help  system.  Every  phase  in  the  process  down  to 
the  sale  of  the  final  commodity  is  in  the  hands  of  the  workman 
himself.  The  workman  or  craftsman,  moreover,  finishes  every- 
thing by  hand,  and  it  is  for  this  reason  that  we  speak  of  the 
handicraft  system.  This  does  not  mean  that  things  were  not 
previously  and  even  subsequently  made  by  hand,  but  calls 
attention  to  the  fact  that  the  distinguishing  mark  is  the  grow- 
ing importance  of  industry  and  the  rise  of  an  independent  class 
of  workmen,  who  conduct  business  enterprises  by  themselves. 
Since  the  producer  makes  to  order  for  a  special  customer, 
the  system  is  also  sometimes  called  the  custom  system,  —  a 
term  still  surviving  in  the  custom-tailor  of  to-day. 

In  the  middle  ages  the  workmen  gradually  banded  them- 
selves together  by  trades  into  compact  organizations  known  as 


§  3§]  Handicraft  System.  9 1 

guilds  or  crafts.  Historically  the  system  has  therefore  come 
to  be  known  as  the  guild  system.  The  guilds,  however,  were 
a  result  rather  than  a  cause  ;  and  in  many  parts  of  the  world 
we  find  the  handicraft  system  without  the  guilds.  Under 
the  guild  system  every  workman  might  ultimately  look  forward 
to  membership.  Starting  in  as  an  apprentice,  he  spent  a  few 
additional  years  as  journeyman,  and  when  he  had  finally 
mastered  all  the  details  of  the  trade,  he  was  admitted  as 
master  craftsman.  To  use  modern  terms,  which  had  no 
meaning  then,  he  was  at  once  employer  and  workman,  capital- 
ist and  laborer.  The  modern  differentiation  of  classes  was 
unknown.  At  the  height  of  their  power  the  guilds  often  se- 
cured a  political  domination.  In  many  countries  they  came 
to  be  virtually  identical  with  the  townsmen ;  the  division  of 
labor  between  land  and  town  assumed  a  sharply  defined  form, 
and  the  manor  became  more  and  more  the  simple  purveyor 
of  raw  material  for  the  guild.  Just  as  the  family  system  of 
industry  corresponds  to  the  typical  isolated  household  economy, 
so  the  guild  or  handicraft  system  corresponds  to  the  typical 
trade  or  local  economy. 

The  guild  system  characterized  the  industrial  life  of  Europe 
for  several  centuries  after  the  Crusades.  With  the  increase  of 
wealth,  however,  a  twofold  process  went  on.  The  guilds  grew 
more  grasping  and  exclusive,  until  they  became  monopolistic 
bodies,  proving  a  drag  upon  industry  instead  of  a  help. 
Membership  was  confined  to  a  select  few  whose  right  to 
practise  the  trade  was  inherited,  and  the  mass  of  the  workmen 
could  no  longer  look  forward  to  participation  in  its  benefits. 
Newer  industries  started  wherever  they  could,  in  independence 
of  the  old  crafts.  Secondly,  and  more  important,  as  the  richer 
craftsmen  amassed  wealth,  they  as  well  as  the  larger  traders 
desired  to  put  it  to  productive  uses.  Thus,  as  we  have  seen, 
there  developed  a  true  industrial  capital  which  could  not  well 
find  employment  within  the  limits  of  the  old  system.  The 
guild  or  handicraft  system  slowly  decayed,  and  there  was 
ushered  in  the  next  stage,  known  as  the  domestic  system. 


92  Historical  Forms  of  Business.         [§  39 

39.  Domestic  System. 

Here  for  the  first  time  we  find  a  line  drawn  between  the 
capitalist  employer  and  the  workman.  In  the  help  system 
there  was  also  an  employer,  but  he  was  himself  both  workman 
and  consumer.  In  the  handicraft  system  the  employer  was  no 
longer  the  consumer,  but  was  still,  in  part  at  least,  the  workman. 
In  the  domestic  system  the  employer  and  the  workman  are  dif- 
ferentiated. The  method  of  sale  of  the  finished  product,  more- 
over, is  another  point  which  distinguishes  the  domestic  system 
not  only  from  the  help  system  but  also  from  the  handicraft 
system.  In  the  help  system  the  product  is  not  sold  at  all ;  it 
is  consumed  by  the  employer.  In  the  handicraft  system,  where 
production  is  carried  on  on  a  small  scale  and  to  order,  the 
commodity  is  sold  directly  by  the  workman  to  the  consumer. 
Now,  however,  where  capital  has  made  production  on  a  larger 
scale  possible,  the  market  is  so  widened  that  the  individual 
workman  is  no  longer  able  to  control  the  means  or  to  devise 
the  machinery  for  placing  the  products  on  the  market.  The 
capitalist  alone  can  do  this. 

The  essence  of  the  domestic  system  consists  in  the  fact  that 
while  the  workman  still  owns  his  tools  and  conducts  the  work 
in  his  own  home,  often  with  the  aid  of  his  family  and  in  con- 
nection with  some  agricultural  activity,  he  no  longer  disposes 
of  the  finished  product.  In  most  cases,  in  fact,  he  no  longer 
buys  or  provides  the  raw  material ;  for  the  same  capitalist  who 
disposes  of  the  product  also  finds  it  possible  to  purchase  the 
raw  material  in  larger  quantities.  The  division  of  labor  goes  a 
step  farther  than  in  the  guild  system.  Not  only  does  one 
class  produce  the  raw  material,  and  another  the  commodity ; 
but  the  production  of  the  commodity  itself  is  now  divided 
between  two  classes,  the  one  buying  the  materials  and  market- 
ing the  goods,  the  other  furnishing  the  productive  power  or 
manual  labor,  the  tools  and  the  work  place. 

The  term  domestic  system  is  not  a  happy  one,  for  under  the 
handicraft  or  guild  system  the  laborer  also  worked  in  his  own 


§  4o]  Factory  System.  93 

home.  It  is  used,  however,  to  distinguish  this  form  of  capitalistic 
enterprise  from  its  successor  where  the  laborer  no  longer  works 
at  home.  Again,  under  the  domestic  system  the  laborer  still 
works  by  hand,  but  since  he  is  no  longer  in  control  of  the  en- 
tire process  of  production  we  distinguish  it  from  the  handicraft 
system.  The  term  that  was  now  applied  to  the  domestic 
workman  is  manufacturer,  the  maker  by  hand  (manus9fa£ere). 
Sometimes,  instead  of  domestic  or  home  work,  we  speak  of 
commission  work.  The  capitalist  owner  of  a  commodity  com- 
mits it  to  another  independent  individual  to  be  worked  up  and 
returned  to  him.  In  the  clothing  trade  to-day  we  still  dis- 
tinguish between  custom  work  (the  old  handicraft  system)  and 
commission  work. 

The  domestic  system,  which  developed  during  the  seven- 
teenth century  and  reached  its  climax  in  England  in  the 
eighteenth,  was  modified  with  the  immixture  of  capital  into  the 
successive  stages  of  business.  The  most  important  change 
was  due  to  the  desire  to  economize  in  production  and  to  ap- 
ply capital  lucratively  through  the  invention  of  labor-saving 
devices,  or  machines,  which  substituted  mechanical  power  for 
human  labor.  In  the  textile  industries,  the  period  before 
1770  marks  the  early  experiments,  the  period  1770-1790  the 
development  of  the  great  mechanical  inventions,  the  period 
1790-1830  the  application  of  steam  power,  and  the  period 
after  1830  the  widening  of  the  market  through  the  railway  and 
the  steamship.1  The  other  industries  soon  followed,  and  there 
was  thus  inaugurated  what  is  termed  the  factory  system. 

40.  Factory  System. 

This  system  is  the  one  under  which  the  modern  world  lives. 
Here  the  capitalist  employer  not  only  provides  the  raw  mate- 
rial and  disposes  of  the  finished  product,  but  also  controls  the 

-  l  The  important  dates  are :  Kay's  flying  shuttle,  1738 ;  Hargreave's 
spinning  jenny,  1764;  Arkwright's  spinning  frame,  1768;  Crompton's 
mule,  1779;  Cartwright's  power  loom,  1785;  Watt  and  Boulton's  steam- 
engine,  1785. 


94  Historical  Foqns  of  Business.          [§  40 

intermediate  process.  The  machinery  is  so  costly  as  to  be 
beyond  the  reach  of  the  workman ;  and  since  the  machines  are 
the  property  of  the  employer  the  building  in  which  production 
is  carried  on  must  also  belong  to  him  and  is  called  the  factory. 
The  laborer  is  not  his  own  master,  as  in  the  handicraft  system ; 
he  no  longer  owns  the  tools  and  the  workshop,  as  in  the 
domestic  system :  all  that  he  does  is  to  provide  the  human 
labor  force  which  is  applied  through  machines  and  in  work- 
places owned  by  the  capitalist  employer.  The  stupendous  in- 
crease of  production  which  is  thus  rendered  possible  reacts 
upon  the  laborer,  both  as  producer  and  as  consumer.  Popu- 
lation increases  enormously,  and  there  is  a  continual  drift  from 
the  country  to  the  city.  Industrial  society  receives  its  modern 
shape,  and  the  social  income  is  divided  into  the  rent  of  the 
landowner,  the  wages  of  the  laborer,  the  interest  of  the  capi- 
talist and  the  profits  of  the  entrepreneur.  "  Manufacturer  " 
no  longer  means  the  handworker,  but  the  individual  who  em- 
ploys others  to  work  for  him.  The  development  of  capital 
leads  to  keener  competition  and  speculation,  new  classes  of 
capitalist  middle- men  arise  and  the  machinery  of  credit  and 
exchange  is  transformed.  The  predominance  of  the  industrial 
capitalist  employer  is  so  pronounced  as  to  give  to  the  whole 
form  of  business  enterprise  the  name  factory  system. 

So  markedly  different  is  this  from  any  of  its  predecessors 
that  the  process  which  brought  it  about  is  commonly  termed 
the  Industrial  Revolution.  If  by  revolution,  however,  we  mean 
a  sudden  and  complete  overturning  of  the  old,  the  name  is  ill 
chosen.  For  the  process  was  a  gradual  one.  It  took  several 
decades  for  the  transition  in  the  English  textile  industries  to  be 
consummated,  and  in  the  other  occupations  the  supplanting  of 
the  domestic  by  the  factory  system  proceeded  step  by  step 
during  the  nineteenth  century.  Outside  of  England,  the 
movement  came  later  and  more  slowly,  while  even  in  England 
there  are  still  a  few  trades,  like  those  of  the  glass- workers,  the 
cutlers  and  the  chain-makers,  in  which  the  factory  system  has 
made  only  slight  inroads. 


§  41]  Corporate  Enterprise.  95 

It  must  not  be  thought  that  each  of  these  forms  of  enterprise 
is  marked  off  from  the  others  by  sharp  lines.  In  every  stage 
we  notice  survivals.  The  family  system  is  still  found  in  the 
outlying  regions  of  almost  all  countries  where  modern  ideas 
have  not  completely  penetrated,  as,  for  instance,  the  Southern 
Appalachian  mountains ;  the  help  system  survives  in  various 
kinds  of  domestic  and  other  service  ;  the  handicraft  method  is 
typified  in  the  cobbler  or  custom  tailor ;  the  domestic  system 
plays  a  considerable  role  in  the  hand-loom  weavers  of  Europe 
and  the  sweat-shops  of  modern  cities  with  their  commission 
work  in  the  clothing  trade.  The  economic  life  of  a  people, 
however,  is  characterized  by  the  type  forms,  not  by  the  sur- 
vivals of  a  preceding  system.  Modern  business  enterprise  is 
based  to  an  overwhelming  degree  on  the  factory  system. 

41.   Associated  and  Corporate  Enterprise. 

We  have  thus  far  discussed  the  growth  of  business  enter- 
prise from  the  point  of  view  of  the  differentiation  of  the  entre- 
preneur. We  have  now  to  treat  it  briefly  from  the  point  of 
view  of  associated  production.  Here  we  can  trace  four  stages, 
—  enterprises  carried  on  by  individuals,  by  partnerships,  by 
corporations,  by  trusts. 

(1)  We  have  seen  that  while  the  family  was  the  earliest  form 
of  associated  activity  it  was  not  well  suited  to  the  keen  eco- 
nomic struggles  inseparable  from  business  life.     Business  enter- 
prise really  begins  with  the  business  man,  and  the  business  man, 
now  as  then,  is  to  a  large  extent  born,  not  made.     Sagacity, 
boldness,  good  judgment  and  administrative  ability  have  always 
been  the  mental  equipment  of  the  successful  merchant.     To 
the  extent  that  the  individual  has  possessed  these  qualities,  he 
has  forged  ahead.     As  business  enterprises  increased,  however, 
the   individual  often  found  himself  unable  to  cope  with  the 
situation  single-handed.     He  therefore  associated  himself  with 
others  who  possessed  some  of  the  qualities  which  he  lacked. 

(2)  The  partnership  was  a  device  to  strengthen  enterprise  at 
its  weak  points.     It  meant  the  association  of  various  kinds  of 


96  Historical  Forms  of  Business.        [§  41 

ability,  and  often  of  capital  and  ability,  and  multiplied  to 
that  extent  the  economic  efficiency  of  the  unit.  The  partner- 
ship, however,  has  decided  limitations.  The  personal  relation 
between  the  partners  and  the  need  of  implicit  confidence  in 
each  other  necessarily  restrict  it  to  a  few  individuals.  As 
soon  as  the  business  calls  for  the  employment  of  a  capital 
beyond  the  means  or  the  desires  of  a  few  partners,  a  new  form 
of  enterprise  is  needed.  This  is  supplied  by  the  corporation. 

(3)  Although  according  to  the  recent  researches  of  Deloume 
and  Weber  the  commercial  corporation  probably  existed  in 
the  later  centuries  of  the  Raman  Republic,  in  its  modern 
shape  it  dates  from  the  early  mediaeval  Italian  cities.  The 
earliest  form  was  that  of  a  bank,  individuals  associating  their 
capital  to  form  a  joint  stock,  loaning  it  to  the  government  on 
a  pledge  of  certain  revenues,  and  participating  in  the  profits 
according  to  their  holdings.  Thus  the  beginnings  of  public 
credit,  of  banking  and  of  corporate  enterprise  are  found  in- 
timately associated.  The  next  important  development  of  the 
joint-stock  principle  was  in  the  trading  companies  of  the  six- 
teenth century,  which  were  at  first  mere  temporary  associations 
for  the  purposes  of  a  single  voyage,  but  which  gradually 
assumed  a  more  permanent  form.  It  was  not,  however,  until 
the  predominance  of  industrial  over  commercial  capital  in  the 
nineteenth  century  that  we  find  the  immense  expansion  of  cor- 
porate enterprise  which  marks  modern  life. 

The  economic  advantages  of  corporations  are  threefold,  — 
joint  stock,  limited  liability,  perpetual  life.  Through  the 
device  of  the  corporate  security,  the  number  of  the  investors 
may  be  multiplied  without  limit.  Every  stockholder  has  a 
voice  in  the  enterprise  in  proportion  to  his  investment.  He 
is  liable  for  the  debts  or  losses  only  to  the  limit  of  his  own 
share.  Modern  states  have  been  slow  to  recognize  this  prin- 
ciple of  limited  liability,  but  it  now  forms  the  very  heart  of  the 
system.  It  removes  the  apprehension  and  distrust  which  lay 
at  the  basis  of  the  overgrown  partnership  and  the  unlimited 
liability  company.  It  has  facilitated  the  marketing  and  trans- 


§  41]  Corporate  Enterprise.  97 

fer  of  the  shares  and  has  rendered  possible  the  vast  accumu- 
lation and  the  minute  dissemination  of  capital.  Finally,  the 
corporation,  unlike  the  individual,  never  dies  until  the  busi- 
ness is  liquidated ;  the  shareholders  disappear,  the  shares 
remain.  It  has  all  the  advantages  of  permanence  and  stabil- 
ity ;  it  can  plan  for  the  morrow  as  well  as  for  to-day,  and  by 
proper  choice  and  renewal  of  its  board  of  directors  it  can  con- 
tinually command  the  highest  ability  and  adjust  itself  to  altered 
needs. 

As  against  these  advantages  there  are  undeniable  short- 
comings. The  "  corporation  problem  "  touches  the  threefold 
relation  of  the  corporation  to  the  investors,  the  employees  and 
the  public.  The  protection  of  the  minority  stockholders  and 
of  the  "  innocent  investors,"  the  mutual  relation  of  the  stock- 
holder and  the  bondholder,  and  the  enforcement  of  real 
trusteeship  on  the  part  of  the  directors  are  matters  that  still 
remain  to  be  adjusted.  The  conditions  of  employment  are 
often  modified  by  what  is  termed  the  substitution  of  the  cash- 
nexus  for  the  old-time  personal  bonds  between  employer  and 
employee.  The  corporation  proverbially  has  no  soul.  Finally, 
as  against  the  public  the  corporation  will  often  do  what  indi- 
viduals as  such  would  shrink  from  doing.  It  is  not  a  light 
task  to  raise  the  plane  of  corporate  morality  to  that  of  individ- 
ual business  ethics.  With  all  its  shortcomings,  however,  the 
corporation  is  indispensable  to  modern  business  activity. 
Without  it  the  world  would  revert  to  a  more  primitive  state  of 
economic  well-being,  and  would  virtually  renounce  the  inesti- 
mable benefits  of  the  best  utilization  of  capital. 

(4)  Where  the  advantages  of  united  capital  on  a  gigantic 
scale  become  still  more  apparent, -the  associations  of  individuals 
into  corporations  are  further  developed  into  unions  between 
corporations.  These  at  first  assume  the  form  of  more  or  less 
loose  agreements,  fixing  prices  or  conditions  of  production. 
A  further  stage  is  reached  when  receipts  are  pooled,  and  the 
unions  adopt  the  name  of  pools.  A  still  closer  association  is 
effected  when  the  enterprises  are  united  under  a  common 

7 


98  Historical  Forms  of  Business.         [§  41 

head,  and  known  as  trusts,  because  originally  the  co-operating 
corporations  put  their  respective  holdings  of  stock  into  the 
hands  of  trustees,  who  were  to  direct  the  joint  enterprise. 
Where,  as  in  the  United  States,  this  particular  method  of  union 
has  been  declared  illegal,  the  same  results  have  been  reached 
by  forming  a  new  and  independent  corporation.  What  are 
to-day  popularly  called  trusts  are  simply  huge  corporations. 
The  trust  problem  is  therefore  in  many  respects  a  phase  of  the 
corporate  problem.  From  this  point  of  view,  as  we  shall  see 
hereafter,  the  so-called  trust  is  as  much  a  natural  development 
from  the  small  corporation  as  the  corporation  itself  is  an  out- 
growth of  the  business  partnership,  or  the  partnership  an  evo- 
lution of  individual  activity.  The  reasons  and  limits  of  this 
development  will  be  studied  below.  It  is  clear,  however,  that 
with  the  growth  and  differentiation  of  capital,  under  the  pro- 
digious development  of  modern  industry,  the  forms  of  business 
enterprise  are  steadily  becoming  more  intricate. 


CHAPTER  VII. 
ECONOMIC   DEVELOPMENT  OF  THE   UNITED   STATES. 

42.   References. 

Katharine  Coman,  Economic  History  of  the  United  States  (1905) ;  C.  D. 
Wright,  Industrial  Evolution  of  the  United  States  (1902)  ;  J.  D.  Whitney, 
The  United  States  (1889)  ;  J.  B.  McMaster,  History  of  the  People  of  the 
United  States  (5  vols.,  1883-1900);  W.  J.  Ashley,  Surveys,  Historic  and 
Economic  (1900),  509-360;  G.  L.  Beer,  The  Commercial  Policy  of  England 
toward  the  American  Colonies  (Columbia  Studies,  III,  1893)  ;  E.  L.  Lord, 
Industrial  Experiments  in  the  British  Colonies  (1898);  P.  A.  Bruce, 
Economic  History  of  Virginia  in  the  Seventeenth  Century  (2  vols.,  1896) ; 
W.  B.  Weeden,  Economic  and  Social  History  of  New  England  (2  vols., 
1890)  ;  F.  J.  Turner,  The  Significance  of  the  Frontier  in  American  His- 
tory (Am.  Hist.  Assoc.,  Report,  1893),  197-227  ;  M.  B.  Hammond,  The 
Cotton  Indttstry  (Am.  Econ.  Assoc.  Publications,  New  Series,  No.  i, 
1897);  chapters  on  "economics"  and  "social  development"  in  most 
of  the  volumes  of  Hart,  American  Nation,  a  History  (27  vols.,  1904-). 


43.   Early  Period  of  American  Economic  Life. 

The  United  States  is  a  particularly  interesting  illustration  of 
economic  development,  because  of  its  rapid  pace  and  because 
of  the  co-existence  of  different  phases.  At  the  beginning  the 
striking  fact,  as  in  all  colonies,  was  the  contact  of  an  intellec- 
tually advanced  population  with  primitive  economic  conditions. 
The  white  man  brought  with  him  the  civilization  of  the  old 
world,  and  was  saved  the  necessity  of  the  painful  evolution  of 
centuries.  Possessing  the  use  of  perfected  tools,  the  concep- 
tion of  private  property,  the  institutions  of  government  and 
of  the  family,  it  was  impossible  for  him  to  revert  to  the  hunt- 
ing or  nomadic  stage.  The  impracticability  of  converting  the 
savage  at  once  into  a  husbandman  led  to  the  disappearance  of 

99 


ioo  Economic  Development.  [§  43 

the  red  man  before  the  economic  onset  of  the  colonist.  Yet 
in  the  presence  of  a  vast  and  unsubjugated  expanse  of  nature 
the  immigrant  had  to  start  afresh  and  to  unlearn  many  a  lesson 
of  his  former  home.  Coming  from  a  trade  or  local  economy, 
he  was  thrown  largely  upon  his  own  resources  in  a  com- 
paratively isolated  economy.  Agriculture  again  became  the 
predominant  occupation  ;  an  agriculture,  however,  now  based 
not  upon  feudalism,  but,  in  the  North  at  least,  upon  the 
independent  farmer.  The  attempts  to  introduce  into  the 
Middle  states  the  types  of  mediaeval  land  relations  could  not 
be  permanently  successful ;  and  only  in  the  South,  for  obvious 
reasons,  was  it  possible  to  reintroduce  the  primitive  system  of 
slavery. 

The  typical  American  was  the  backwoodsman,  using  his  gun 
but  wielding  his  axe,  and  depending  primarily  upon  his  hoe 
and  plough.  Step  by  step  he  cleared  the  forest  and  cultivated 
the  soil,  and  in  this  continually  renewed  contest  with  nature 
hammered  out  those  sturdy  qualities  of  mind  and  heart  which 
soon  enabled  him  to  add  political  to  economic  independence. 
The  frontier  is  the  home  of  democracy,  because  the  frontier  is 
the  home  of  economic  equality.  As  it  was  gradually  pushed 
inland  the  communities  which  had  left  the  frontier  stage  behind 
them  developed  from  the  family  system  of  industry,  through 
the  help,  into  the  handicraft  and  domestic  system.  The  guilds 
which  were  fast  decaying  in  the  old  world  found  no  foothold 
in  the  new ;  and  as  the  villages  and  towns  sprang  up  the  in- 
significant industry  was  carried  on  by  the  independent  handi- 
craftsman. Everywhere,  moreover,  agriculture  was  the  chief 
source  of  wealth. 

In  the  South  the  increasing  accumulations  of  wealth  were 
put  into  more  land  and  more  capital.  In  the  Middle  states, 
and  a  little  later  in  the  Northern  states,  the  new  wealth  took 
the  form  of  commercial  capital ;  and  as  it  was  gradually  pushed 
into  industry  the  domestic  system  arose.  At  the  time  of  the 
Revolution  and  down  to  the  war  of  1812  the  "  manufacturer" 
was  still  the  manual  workman,  and  the  whole  industrial  devel- 


§44]  Recent  Growth.  101 

opment  was  insignificant  in  the  extreme.  The  war  with  Eng- 
land and  the  years  of  unrest  which  preceded  it  brought  about 
a  shifting  of  capital  from  commercial  to  industrial  pursuits, 
and  the  factory  system  was  fairly  inaugurated,  in  a  few  of  the 
textile  industries  at  least.  Under  the  fostering  care  of  the 
"  American  system,"  as  the  new  protective  policy  was  called, 
the  industries  throve,  —  although  we  must  not  exaggerate  the 
influence  of  legislation  upon  what  would  at  all  events  have 
been  the  natural,  even  if  slow,  evolution  of  industrial  capital. 
For  this  natural  growth  in  the  North  and  East  was  due  to  the 
pushing  of  the  frontier  beyond  the  Alleghanies,  and  to  the  con- 
sequent accumulation  of  agricultural  profits  which  soon  took 
the  form  of  industrial  capital  under  the  impetus  of  the  demand 
of  an  increasing  population  for  manufactured  products.  Nor 
was  this  growth  checked  by  the  reversal  of  the  tariff  policy  and 
the  adoption,  during  the  thirties  to  the  fifties,  first  of  the  Com- 
promise, and  then  of  the  so-called  Free  Trade  systems,  dictated 
by  the  manifest  interests  of  the  politically  dominant  South. 
The  South,  as  the  exporter  of  cotton  and  the  importer  of 
manufactured  products,  had  clearly  no  interest  in  the  develop- 
ment of  industrial,  as  over  against  commercial  or  agricultural, 
capital. 

44,   Growth  of  American  Industry  in  the  Nineteenth  Century. 

The  growth  of  prosperity  during  the  middle  of  the  nine- 
teenth century  was  due  primarily  to  other  causes,  three  in 
number:  (i)  the  rich  valleys  of  the  Mississippi  and  its  tribu- 
taries were  reached  by  the  tide  of  immigration ;  (2)  the  aboli- 
tion of  the  corn  laws  in  England  opened  a  vast  and  profitable 
outlet  for  the  increasing  yield  of  wheat;  (3)  the  discovery  of 
gold  in  California  furnished  an  immense  treasury  of  mineral 
wealth.  There  was  thus  repeated  on  a  large  scale  what  had 
occurred  in  a  smaller  way  a  generation  earlier.  This  conver- 
sion of  agricultural  and  mineral  wealth  into  industrial  capital 
assumed,  however,  a  slightly  different  form.  Although  the 
textile  and  iron  industries  now  supplied  a  larger  output  for  the 


102  Economic  Development.  [§44 

increasing  demand  of  a  quickly  growing  population,  the  chief 
need  and  the  most  lucrative  employment  of  capital  was  associ- 
ated with  the  development  of  modern  transportation  methods. 
The  railroad  becomes  the  most  striking  form  of  corporate  en- 
terprise. Up  to  the  middle  of  the  century  the  few  corpora- 
tions—  chiefly  banks,  turnpikes,  canals  and  railways — were 
compelled  to  take  out  separate  charters.  Now  under  general 
incorporation  laws  the  railroads  multiplied  and  soon  brought 
in  their  wake  all  kinds  of  industrial  enterprises.  From  this 
time  on  the  country  was  fairly  launched  on  the  wide  sea  of 
corporate  activity. 

The  agitation  which  culminated  in  the  civil  war  was  at 
bottom  the  political  expression  of  an  economic  antagonism 
between  two  divergent  systems.  The  one  was  based  on  agri- 
culture, and  heaped  up  its  wealth  in  the  transition  forms  from 
an  isolated  to  a  trade  economy  resting  on  slavery.  The  other 
had  but  just  entered  on  the  stage  of  the  capitalist  economy, 
and  the  influence  of  the  rapidly  developing  factory  system  in 
providing  a  home  market  for  the  independent  Western  farmer 
soon  united  the  economic  interests  into  a  compact  and  self- 
conscious  whole.  The  phenomenal  growth  of  the  fifties,  which 
menaced  the  economic  preponderance  of  the  South,  brought 
the  conflict  to  a  head.  The  South  possessed  if  anything  the 
greater  statesmen,  the  more  gifted  military  leaders  and  the  bet- 
ter navy ;  but  when  the  outlet  for  its  staple  crop  was  stopped 
up  by  the  civil  war  it  died  of  inanition  and  fell  a  victim  to 
the  economic  superiority  of  its  industrially  diversified  and 
therefore  more  enduring  antagonist. 

It  took  the  South  a  generation  to  repair  the  ravages  of  the 
desperate  conflict,  but  with  the  beginning  of  the  new  genera- 
tion the  inevitable  results  appear.  Here  and  there  in  the 
South  the  march  of  industrial  capitalism  is  under  full  swing, 
and  the  conversion  of  the  handicraft  and  domestic  stages  into 
the  factory  system  is  proceeding  apace.  The  transition  in 
several  of  the  Southern  states  is  bringing  to  the  front  eco- 
nomic and  political  issues  which  agitated  New  England  a 


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§44] 


Recent  Growth. 


103 


generation  or  two  earlier,  and  which  were  fought  out  in  old 
England  before  the  middle  of  the  century. 

In  the  North  the  post-bellum  period  witnessed  an  acceler- 
ation of  the  movement  which  had  so  auspiciously  begun. 
Notwithstanding  the  great  increase  of  industry  in  the  East,  the 
rapid  opening  up  of  the  far  West  and  the. application  of  capi- 
talist methods  to  the  exchange,  and  even  in  part  to  the  produc- 
tion, of  farm  products  so  stupendously  augmented  the  output 
that  the  prosperity  of  the  country  still  in  large  measure  rested 
on  its  agricultural  wealth.  Toward  the  end  of  the  century, 
however,  with  the  practical  exhaustion  of  the  free  land  which 
enjoyed  adequate  rainfall,  the  industrial  movement,  which  had 
been  gradually  creeping  farther  west,  now  furnished  a  con- 
tinually more  lucrative  opening  for  the  employment  of  the  fast 
accumulating  capital.  By  1900  over  a  third  of  the  entire  pop- 
ulation lived  in  the  commercial  and  industrial  centres,  and 
about  a  third  of  the  exports  consisted  of  manufactures. 

The  change  in  the  character  of  the  national  production, 
and  the  transition  from  agricultural  to  industrial  conditions, 
are  illustrated  by  the  following  tables  : 

PRODUCTIONS   OF  THE   UNITED   STATES 
(IN   MILLIONS). 


1850. 

1870. 

1900. 

Population 

27 

•7Q 

76 

Farm  Products       

*O 

not  given 

jy 

$1  QS8 

$7  ?6d 

Minerals  .          .               .          .     . 

«        « 

2IQ 

I  o6l 

Manufactures 

$1  OIQ 

^iy 

1J>VJjy 

EXPORTS   OF   THE   UNITED   STATES    (IN    MILLIONS). 


1860. 

Per  cent. 

1900. 

Per  cent. 

Agricultural  Products      .     .     . 
Mining,  Forest  and  Fisheries 
Manufactures 

#257 
19 

4O 

81.13 
6.II 
I  °  76 

£835 
101 

60.98 

7-47 
•31  6c 

4J4 

O1>ui 

1 04  Economic  Development.  [§  45 

On  page  105  will  be  found  the  details  of  the  chief  products 
of  the  United  States,  as  well  as  the  most  important  exports 
of  manufactures.  On  the  charts  opposite  pages  102-103, 
104—105  and  1 06  will  be  found  statistics  of  the  growth  since 
1850  of  certain  agricultural  products,  general  manufactures 
and  iron  ore.  It  will  surprise  many  to  learn  that  there  were 
in  1900  six  classes  of  manufactured  products  each  aggregating 
over  half  a  billion  dollars  in  value,  as  against  one  agricultural 
product  and  no  mineral  products. 

45.   Recent  Development  of  American  Industry. 

This  gigantic  increase  in  capital  has  not  only  created  the 
transition  to  the  period  of  trusts  and  huge  corporations,  but 
has  emphasized  the  national  and  international  significance  of 
the  modern  movement.  The  economic  unit  in  the  United 
States  is  fast  becoming  a  national  unit.  Industry  is  no  longer 
confined  to  the  old  local  limits.  Commercial  interests  have 
overstepped  the  boundaries  of  any  one  state.  Action  by  any 
one  commonwealth  inevitably  reacts  upon  its  neighbor.  Eco- 
nomic and  political  methods  framed  on  the  old  assumption 
that  business  is  local  are  bound  to  create  injustice  and  dis- 
satisfaction. Secondly,  the  transition  to  a  more  intensive 
capitalism  and  the  growth  of  industrial  exports  mark  the 
economic  as  well  as  the  political  maturity  of  the  country. 
The  acquisition  of  Porto  Rico  and  the  Philippines  is  more 
than  a  mere  accident.  The  foreign  market  is  becoming  an 
adjunct  to  our  industry  rather  than  to  our  agriculture ;  it 
assumes  such  importance  because  our  economic  welfare,  so  far 
as  it  rests  upon  international  trade  at  all,  will  be  affected  more 
and  more,  not  by  what  the  foreigner  must  have  in  the  shape  of 
food,  but  by  what  he  can  be  persuaded  into  wanting  in  the 
shape  of  finished  products. 

There  is,  however,  another  side  of  the  picture.  The  United 
States  has  so  rapidly  outgrown  the  swaddling  clothes  of  its 
infant  economic  surroundings,  and  has  stepped  with  such 
giant  strides  from  its  youthful  social  environment  to  the 


1. 

o      o      o      o      o      o 

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0 

§  45]  Recent  Industrial  Changes.  105 


ANNUAL  VALUE  OF  THE  MORE  IMPORTANT  PRODUCTS 
(IN  MILLIONS).1 

MANUFACTURES. 

1900 

Iron  and  Steel $804 

Slaughtering  and  Meat  Packing  790 

Foundry  and  Machine  Shop      .  645 

Men's  and  Women's  Clothing  .  575 

Lumber  and  Timber     .     .     .     .  567 

Flouring  and  Grist  Mill    ...  561 

Printing  and  Publishing    .     .     .  347 

Cotton  Manufacture      ....  339 

Carpentering 316 

Woolen  Manufacture    ....  297 

Tobacco  Manufactures      .     .     .  263 

Boots  and  Shoes 261 

Malt  Liquors 241 

Cars 238 

Leather 218 

Masonry 204 

Bread  and  Bakery 204 

Lead  Smelting  and  Refining      .  176 


FARM 

CROPS. 

1900 

1903 

Corn  .... 

$828    J 

&OC7 

Hay    .... 

•      484 

s  33 

556 

Wheat     .     .     . 

•      369 

443 

Cotton     .     .     . 

•      323 

454 

Oats    .... 

.      217 

267 

Forest  Products 

no 

Potatoes  .     .     . 

.        98 

151 

Orchard  Products         84 

Tobacco  .     .     . 

57 

55 

Wool  (1901)    . 

51 

59 

MINERAL 

PRODUCTS. 

Pig  Iron  .     .     . 

.      260 

344 

Coal    .... 

221 

5°4 

Copper    .     .     . 

.           98 

92 

Gold 

79 

74 

Silver      .     .     . 

.        76 

70 

Petroleum    .     . 

.        76 

95 

Stone       .     .     . 

.        65 

68 

VALUE   OF   EXPORTS   OF  MANUFACTURES 
(IN   MILLIONS). 


1890. 

1900. 

Iron  and  Steel  Manufactures    . 

$26 

$122 

Refined  Mineral  Oil     

At 

68 

Copper  Manufactures  

2 

s8 

Leather  Manufactures 

12 

27 

Cotton  Manufactures  
Agricultural  Implements 

10 

24 

16 

Chemicals        . 

12 

Wood  Manufactures    

6 

j  i 

All  Manufactures    .                    .     . 

TCI 

At  A 

17  Q 

4j^- 

i/.y 

J1-/ 

1  Arranged  from  the  Twelfth  Census  of  the  United  States  (Vol.  VII  and 
Abstract),  the  Statistical  Abstract  of  the  United  States,  and  The  Mineral 
Resources  of  the  United  States. 


106  Economic  Development.  [§46 

complex  conditions  of  a  full-grown  industrial  society,  that  the 
development  has  been  most  uneven.  America  presents  in 
some  respects  the  most  striking  contrasts.  It  is  at  once  the 
youngest  and  the  oldest  of  economic  societies.  It  is  the 
youngest,  in  the  sense  that  there  are  still  large  tracts  untouched 
by  plough  or  harrow,  awaiting  the  coming  of  the  first  settler  and 
needing  only  irrigation  to  convert  the  desert  into  a  garden.  It 
is  young  because  there  are  huge  sections,  only  one  step  removed 
from  the  primitive  economic  stage,  under  conditions  analogous 
to  those  which  the  old  world  faced  many  centuries  ago.  In 
another  sense,  however,  America  is  not  young,  but  old.  No- 
where on  the  face  of  the  globe  has  capital  been  applied  to 
productive  purposes  with  such  intensity  and  such  energy. 
Nowhere  has  man's  victorious  contest  with  the  powers  of 
nature  been  waged  with  such  intelligence  and  such  relentless 
vigor.  Nowhere  have  the  captains  of  industry  prosecuted 
their  quest  for  industrial  supremacy  with  such  alertness  and 
ability.  As  a  consequence,  nowhere  have  the  most  ad- 
vanced forms  of  a  highly  organized,  fully  differentiated,  thor- 
oughly complex  industrial  organism  been  evolved  with  such 
startling  rapidity  and  such  complete  success.  In  the  develop- 
ment of  these  new  economic  institutions  America  is  leading 
the  world  and  is  showing  other  countries  what  stages  they  have 
still  to  traverse.  While  the  movement  toward  combination  of 
capital  has  even  in  Europe  made  only  timid  beginnings,  it  is 
revolutionizing  American  industry.  In  this  sense  America  is 
old,  —  far  older  than  most  of  its  industrial  rivals. 

46.    Modern   Problems   of  America. 

As  a  result  of  the  forces  just  described,  we  are  face  to  face 
with  two  sets  of  problems.  The  one  set  has  its  origin  in  the 
newer  and  less  developed  sections  of  the  country,  and  may  be 
illustrated  by  the  currency  question.  This  includes  far  more 
than  is  implied  in  the  term  itself.  It  involves,  in  large  sections 
of  the  West  and  the  South,  not  so  much  an  increase  of  the 
money  supply  as  a  rearrangement  of  the  economic  forces  and 


§46]  Modern  Problems.  107 

a  readjustment  of  the  relations  of  indebtedness  to  productive 
capacity.  With  every  shifting  of  the  frontier  farther  westward 
we  have  had  such  periodical  readjustments.  At  the  very 
beginning  of  our  national  life,  when  the  frontier  was  located  in 
western  Massachusetts,  came  the  economic  outbreak  known 
as  Shays'  Rebellion.  A  generation  later  similar  causes  produced 
on  the  new  frontier  the  troubles  which  culminated  in  the  stay- 
laws  of  Kentucky.  When  the  frontier  reached  the  Middle 
West,  almost  half  a  century  later,  the  same  movement  assumed 
the  guise  of  the  fiat  money  craze.  Finally,  after  the  lapse  of 
another  generation,  when  analogous  economic  forces  worked 
out  their  result,  not  only  in  the  frontier  life  of  the  West,  but 
also  amid  the  primitive  economic  conditions  of  large  sections 
of  the  regenerated  but  as  yet  undeveloped  South,  we  reach 
the  discussion  of  silver  currency  which  began  in  the  seventies 
and  culminated  in  the  nineties.  With  the  disappearance  of 
the  frontier  and  the  not  far  distant  industrial  awakening 
throughout  the  entire  South,  it  is  probable  that  the  money 
question  will  assume  as  subordinate  a  role  in  the  future  of  the 
United  States  as  it  has  assumed  in  the  advanced  countries  of 
Europe. 

On  the  other  hand,  the  second  set  of  problems  that  confront 
us  is  due  to  the  new  and  complex  industrial  conditions  of  the 
more  advanced  sections.  These  new  conditions  have  given  us 
the  corporation  problem,  the  wages  problem,  the  tax  problem, 
the  colonial  problem,  the  city  problem.  It  is  as  idle  to  inveigh 
against  the  policy  of  territorial  expansion,  on  the  ground  that 
such  a  scheme  was  not  contemplated  by  Washington,  as  it 
would  be  futile  to  object  to  the  regulation  of  combinations 
because  this  also  involves  a  new  departure.  In  the  one  case, 
as  in  the  other,  economic  conditions  have  arisen  which  were 
unknown  to  the  fathers,  and  which  require  for  their  solution 
a  new  analysis  and  a  new  method. 

What  is  peculiarly  confusing,  therefore,  is  the  fact  that  on 
the  one  hand  we  have  sections  where  the  economic  conditions 
are  of  a  primitive  type,  while  on  the  other  hand  in  numerous 


io8  Economic  Development.  [§46 

parts  of  these  sections  themselves  there  have  been  grafted 
upon  the  still  dominant  and  persistent  primitive  stock  the 
shoots  of  the  modern  industrial  type.  The  newer  methods  of 
transportation,  as  well  as  the  modern  media  of  exchange  and 
distribution,  have  superimposed  upon  the  simplicity  of  an 
undeveloped  agricultural  community  the  complexity  of  mod- 
ern industrial  enterprise.  The  consequence  is  that  the  eco- 
nomic conditions  of  the  country  are  supremely  heterogeneous, 
although  tending  to  become  homogeneous.  Because  of  this 
contest  of  the  old  with  the  new,  we  are  in  many  respects  still 
groping  in  the  dark,  dissatisfied  in  the  more  progressive  com- 
munities with  the  survivals  of  old  conditions,  and  trying  to 
discern  in  the  dim  light  of  the  future  the  final  expression  of 
the  newer  conditions  which  are  soon  to  become  universal. 


CHAPTER     VIII. 
DEVELOPMENT   OF   ECONOMIC   THOUGHT. 

47.  References. 

J.  K.  Ingram,  A  History  of  Political  Economy  (1888)  ;  L.  Cossa,  An 
Introduction  to  the  Study  of  Political  Economy  (trans,  by  L.  Dyer,  1893)  > 
G.  Conn,  A  History  of  Political  Economy  (trans,  by  J.  A.  Hill,  1894) ;  E. 
Nys,  Researches  in  the  History  of  Economics  (trans,  by  Dryhurst,  1899)  ; 
W.  Bagehot,  Economic  Studies  (1880),  chs.  iii-v;  W.  J.  Ashley,  Surveys 
(1900),  263-309,  and  English  Economic  History,  I  (1888),  ch.  iii,  II  (1893), 
ch.  vi ;  L.  L.  Price,  Short  History  of  Political  Economy  in  England  from 
Adam  Smith  (1891)  ;  E.  Cannan,  History  of  Theories  of  Production  (1904), 
chs.  ix,  x;  8.  N.  Patten,  Development  of  English  Thought  (1899),  c^-  v> 
and  Dynamic  Economics  (1892),  chs.  i-vi;  H.  Eisenhart,  Geschichte  der 
Nationalokonomik  (26.  ed.,  1891) ;  A.  Oncken,  Geschichte  der  National- 
bkonomie,  I  (1902)  ;  A.  Dubois,  Precis  de  I*  Histoire  des  Doctrines  Econo- 
miques, I  (1903) ;  J.  Rambaud,  Histoire  des  Doctrines  Economiques  (1899)  '•> 
A.  Espinas,  Histoire  des  Doctrines  Economiques  (1900)  ;  E.  de  Girard, 
Histoire  de  VEconomie  Sociale  jusqifa  la  Fin  du  XVI.  Sticle  (1900). 

48.   Economic  Theory  in  Classic  Antiquity. 

It  has  often  been  said  that  economics  is  a  modern  science. 
In  point  of  fact,  it  is  only  modern  economics  that  is  a  modern 
science.  Every  economic  stage  which  has  been  marked  by 
any  scientific  thinking  at  all  has  had  its  own  economic  theory. 
The  stars  indeed  moved  for  aeons  before  man  thought  of  as- 
tronomy. So  economic  phenomena  existed  for  centuries  be- 
fore any  attempt  was  made  to  analyze  them.  Once  formulated, 
however,  the  economic  theory  of  any  period  is  usually  nothing 
but  the  reflex  of  its  economic  life. 

The  earliest  speculation  on  economic  phenomena  of  which 
we  have  any  knowledge  is  that  of  classic  antiquity.  Prior  to 
the  Greeks  we  find  only  ethical  exhortations  on  social  reform 

109 


1 1  o  Economic  Thought.  [§  48 

as  among  the  Oriental  nations,  or  practical  treatises  on  agron- 
omy as  among  the  Carthaginians.  But  both  Aristotle  and 
Xenophon,  to  mention  no  others,  wrote  distinct  treatises  on 
economics.  Greek  and  Roman  economic  life  was  not  only 
based  on  slavery,  but  never  outgrew  the  period  of  domestic 
industry  and  petty  trade.  This  explains  both  the  content 
and  the  omissions  in  Greek  and  Roman  economics.  Wealth 
existed,  and  \ve  find  the  term  discussed ;  but  stress  was  laid 
primarily  upon  the  uses  to  which  it  might  be  put  by  the  indi- 
vidual. The  idea  of  value  was  apprehended,  and  the  distinc- 
tion between  utility  and  value  pointed  out ;  but  no  further 
application  of  the  distinction  was  made.  Private  property  had 
long  been  known ;  and  we  thus  find  interesting  theories  as  to 
its  origin  and  justification  as  against  the  dreams  of  the  com- 
munists, the  socialists  and  the  land  nationalizers,  who  flour- 
ished then  as  now.  Since  the  economic  conditions  were  such 
that  slave  labor  was  highly  productive,  slavery  was  defended 
as  a  natural  institution  and  as  compatible  with  the  highest 
morality. 

In  the  early  system  of  industry  the  relation  of  master  and 
slave  was  like  that  of  husband  and  wife,  of  parent  and  child : 
the  slave,  the  wife  and  the  child  all  belonged  to  the  household 
head ;  their  labor  was  necessary  to  the  family  maintenance. 
When  in  later  centuries  the  economic  conditions  of  imperial 
Rome  made  slave  labor  less  productive,  it  is  significant  that 
the  writers  first  pointed  out  the  moral  shortcomings,  and  a 
century  or  two  later  the  economic  defects,  of  slavery.  In  the 
main,  however,  at  the  time  of  the  chief  prosperity  of  Greece 
and  Rome,  industrial  capital  did  not  exist  as  a  controlling  force 
in  production  :  thus  neither  the  term  nor  the  idea  is  found  ; 
capital  is  not  yet  differentiated  from  wealth.  It  is  a  striking 
fact  that  Aristotle  seems  to  have  a  premonition  of  a  future 
industrial  system  when  he  says  :  "  If  the  combs  would  make 
the  web  close,  or  if  the  keys  of  themselves  struck  the  harp, 
masters  would  need  no  assistants  nor  slaves."  But  although 
capital  had  acquired  no  importance,  a  considerable  division  of 


§  48]  Theory  in  Antiquity.  1 1 1 

labor  based  on  handicraft  industry  is  found  in  actual  life  and  is 
accordingly  discussed  in  the  economic  treatises. 

If  the  theory  of  production  was  simple,  that  of  distribution 
was  entirely  absent.  For  it  was  the  landowner  who  controlled 
the  processes,  and  owned  the  results,  of  production.  The  land- 
lord was  the  property  lord,  and  even  where  commercial  capital 
developed,  it  was  the  large  landowner  who  also  carried  on 
the  great  commerce.  Even  where  the  independent  trader 
developed,  however,  his  gains  seemed  to  be  of  the  same  nature 
as  those  of  the  landowner.  There  was  thus  no  distinction  recog- 
nized between  land  and  capital,  as  factors  in  production.  The 
landlord,  again,  was  the  slave  owner ;  there  was  thus  no  line 
drawn  between  land  and  labor,  and  no  theory  of  wages.  The 
doctrines  of  rent,  profits  and  wages  did  not  emerge,  because 
the  phenomena  themselves  did  not  exist  as  the  incomes  of 
separate  social  classes.  There  was  not  even  a  theory  of  indi- 
vidual income  ;  the  mass  of  property  yielded  indeed  a  return 
or  produce,  but  this  entire  produce  simply  went  to  swell  the 
property,  just  as  the  expenses  had  been  a  part  of  the  property. 
We  have  many  terms  for  property,  but  no  distinction  between 
produce  and  income. 

This  explains  also  the  classical  theory  of  interest.  Funds 
were  loaned  not  as  capital,  but  as  money.  So  far  as  there  was 
any  credit,  it  was  primarily  for  consumption  ;  that  is,  the  loans 
were  mere  personal  loans  made  to  tide  over  temporary  em- 
barrassment. Even  when  money  was  loaned  in  agriculture  or 
in  trade,  the  function  of  capital  was  not  understood,  because 
only  when  capital  is  used  in  industry  is  it  easy  to  realize  its 
productivity.  Interest  was  thus  regarded  as  paid  for  the  use 
of  money,  and,  as  money  is  in  itself  barren,  interest  was  deemed 
unjustifiable.  As  a  matter  of  fact,  the  interest  charged  on  such 
loans  did  often  have  the  effect  of  usury  and  frequently  resulted 
in  the  subjection  of  the  debtor  to  the  creditor.  In  the  absence 
of  industrial  capital  there  was  some  justification  for  the  theo- 
retic opposition  to  interest.  In  the  later  centuries  of  impe- 
rial Rome,  when  commercial  capital  had  developed,  interest 


112  Economic  Thought.  [§  49 

became  necessary ;  but  it  was  then  defended  in  the  Roman 
code  by  virtue  of  a  legal  fiction,  not  on  economic  grounds. 

During  the  later  period  of  Greek  and  Roman  life  the  origi- 
nal barter  economy  had  given  way  to  a  money  economy. 
The  classic  writers  therefore  devote  some  attention  to  the 
theory  of  money.  The  whole  theory  of  price,  however,  was 
still  much  neglected,  because  trade  was  something  outside  of 
the  ordinary  activity  of  the  slave  plantation,  and  business  en- 
terprise had  but  little  scope  under  a  system  of  handicraft  in- 
dustry. It  is  thus  easy  to  understand  Aristotle's  and  Plato's 
condemnation  of  such  vocations  as  something  "unnatural,"  or 
Cicero's  characterization  of  them  as  sordid  and  "  unbecoming 
a  gentleman."  As  with  the  private  economy,  so  with  the  pub- 
lic economy.  The  revenues  of  government  were  derived 
chiefly  from  its  own  lands,  worked  in  the  same  way  as  in  any 
private  household.  Direct  taxes  were  unknown  except  in  ex- 
traordinary emergencies.  The  amassing  of  treasure,  not  the 
use  of  public  credit,  served  for  war  purposes.  Hence  the 
Greek  treatises  on  public  finance  deal  with  subjects  that  are 
almost  completely  absent  from  modern  works. 

Classic  antiquity,  in  short,  had  an  economic  theory  which  ex- 
plained its  economic  phenomena ;  we  must  not  criticise  it  on  the 
ground  that  it  does  not  explain  our  phenomena.  • 

49.  Mediaeval  Economic  Theory. 

After  the  intervening  centuri.es  of  mental  darkness  and  indus- 
trial stagnation,  economic  theory  began  anew  with  the  growth 
of  enterprise  in  the  twelfth  century.  The  new  theory  was  the 
outgrowth  of  the  new  economy.  The  typical  fact  of  this  new 
economy  was,  as  we  have  seen,  the  development  of  trade  and 
commerce,  no  longer  based  on  slavery.  The  great  problem  of 
mediaeval  economics  thus  became  the  problem  of  exchange 
value  and  how  to  make  this  new  kind  of  values  conform  to 
the  demands  of  justice.  Since  things  were  no  longer  made  to 
be  consumed  at  home,  as  in  the  earlier  centuries,  but  were 
now  made  to  sell,  the  question  arose,  for  what  shall  they  sell, 


§  49]  Mediaeval  Theory.  1 1 3 

or  what  is  the  proper  and  reasonable  price?  The  answer 
could  not  be  the  price  *as  fixed  by  competition,  because  in  the 
mediaeval  economy  there  was  no  free  competition.  Goods 
were  produced  •  by  the  guilds,  but  the  guildsmen  could  not 
underbid  each  other.  Even  in  articles  which  came  from  out- 
side, to  take  advantage  of  one's  neighbor  by  purchasing  the 
wares  before  they  reached  market,  or  by  buying  at  wholesale 
to  sell  at  retail,  was  deemed  a  heinous  offence.  In  an  economy 
whose  keynote  was  production"  to  order,  and  where  every  one 
did  just  what  his  father  had  done,  custom,  not  competition, 
fixed  the  price.  With  human  nature  as  it  is,  however,  men 
would  always  be  found  who  attempted  to  overreach  their 
neighbors.  Since  custom  could  not  be  relied  upon,  it  became 
necessary  for  government  to  step  in  and  to  regulate  the  price. 
In  point  of  fact,  when  mediaeval  prices  were  not  regulated  by 
custom,  they  were  fixed  by  statute. 

Economic  theory  thus  discussed  the  question  :  what  is  the 
just  or  the  natural  price  ?  It  became  in  part  a  moral  question, 
even  though  the  answer  must  rest  on  economic  considerations. 
The  mediaeval  economists  were  no  longer  the  general  philoso- 
phers, as  in  classic  antiquity,  but  primarily  the  theologians. 
Economics  became  a  part  of  theology. 

In  framing  his  theory,  the  mediaeval  economist  had  to  take 
business  life  as  he  found  it.  The  characteristic  fact  of  mediae- 
val industry  was  the  free  laborer,  the  petty  guildmaster.  Slav- 
ery was  fast  disappearing,  and  accordingly,  with  the  exception 
of  a  few  of  the  early  authors  who  were  strongly  influenced  by 
the  newly  discovered  writings  of  Aristotle,  we  find  no  defence 
of  slavery.  Again,  since  the  whole  economy  was  now  based 
on  industry  and  trade,  the  classical  theory  of  business  as  an 
unnatural  pursuit  soon  disappeared.  Now  arose  the  question  : 
how  should  business  gains  be  explained,  —  or,  in  other  words, 
what  fixes  the  price  of  the  finished  article  ? 

There  could  be  only  one  answer  to  this  question.  Industrial 
capital  did  not  exist,  —  that  is,  not  as  an  important  or  typical 
fact.  Since  there  was  no  conception  of  capital,  there  could  be 

8 


ii4  Economic  Thought.  [§  49 

no  theory  of  profits.  The  guildmaster  employed  his  own 
work,  on  his  own  tools.  The  labor  e'xpended  was  the  chief 
consideration  ;  and  cost  of  production  became  the  explanation 
of  the  reasonable  price,  and  the  guide  to  the  legislator  in  fix- 
ing tariffs.  To  carry  on  business  for  the  sake  of  making  gains 
was  therefore  still  deemed  immoral,  but  to  trade  in  order  to 
recover  the  result  of  one's  labor  was  justifiable.  Money  mak- 
ing as  such  is  wrong ;  money  making  to  support  one's  self  or 
one's  family  by  the  proceeds  of  one's  industry  is  legitimate. 
All  through  the  middle  ages  the  economic  theory  objected  to 
a  man  charging  more  for  a  thing  than  it  was  worth,  or  buying 
a  thing  cheap  and  selling  it  dear,  or  selling  a  thing  at  a  higher 
price  for  credit  than  for  cash.  For  in  all  such  cases  it  was 
presumed  that  gains  were  made  without  any  actual  labor 
having  been  expended.  It  was  only  as  business  enterprise 
developed  that  the  other  constituent  elements  of  gain  were 
recognized ;  but  the  theory  continued  to  include  them  in  the 
actual  labor  cost. 

The  other  great  mediaeval  theory  —  the  usury  doctrine  — 
may  likewise  be  put  under  the  head  of  exchange.  For  usury 
was  regarded  as  the  price  paid  for  the  use  of  money,  itself  the 
medium  of  exchange.  In  an  age  where  the  productive  em- 
ployment of  capital  was  unknown,  the  prohibition  of  interest 
did,  on  the  whole,  more  good  than  harm.  As  commercial 
capital  developed,  the  force  of  the  prohibition  was  weakened 
by  the  economic  theory  of  damnum  emergens  and  lucrum  ces- 
sans :  if  the  lender  could  show  that  he  had  suffered  any  loss  or 
had  been  prevented  from  making  any  gains  through  not  having 
the  money,  he  might  charge  a  return.  The  wedge  was  slowly 
pushed  farther  in ;  but  it  was  not  until  industrial  capital  had 
developed  at  the  close  of  the  middle  ages  that  a  distinction 
was  drawn  between  legitimate  interest  and  illegitimate  usury. 
In  the  guild  system  proper,  where  no  capital  was  needed, 
interest  was  an  anachronism. 

The  only  other  economic  topic  that  was  discussed  in  addi- 
tion to  these  two  fundamental  points,  was  likewise  one  of 


§  50]  Mercantile  Doctrine.  115 

exchange,  —  that  of  money.  Money  became  of  such  para- 
mount importance  that  we  find  the  treatment  of  money  prob- 
lems no  longer  confined  to  the  theologians,  but  participated  in 
by  specialists.  The  mediaeval  writers  on  money  form  almost 
the  only  class  of  lay  economists,  pure  and  simple. 

Mediaeval  economic  theory,  therefore,  centred  about  the 
problems  of  exchange.  Production  was  so  simple  that  it  was 
not  discussed.  In  the  absence  of  capital,  there  was  no  ques- 
tion of  production  on  a  large  or  small  scale.  Since  the  pro- 
ductive process  was  a  unit,  there  was  not  even  a  discussion 
of  the  division  of  labor.  Problems  of  distribution  there  were 
but  few.  Since  there  was  no  industrial  capital,  there  were  no 
profits  ;  since  the  workman  was  in  the  main  his  own  employer, 
there  were  no  wages,  or  so  far  as  wages  were  paid,  they  were 
paid  by  the  consumer,  and.  not  by  any  capitalist  employer. 
Even  though  the  conception  of  rent  to  the  landlord  now 
appeared,  the  land  was  not  normally  bought  and  sold,  and  the 
landlord's  rent  was  regarded,  not  as  a  separate  source  of  in- 
come, but  as  a  kind  of  property,  like  that  of  the  ordinary 
townsman.  Finally,  problems  of  consumption  attracted  little 
attention.  In  an  age  when  custom  reigned  supreme,  and 
when  unusual  expenditure  was  deprecated  as  ungodly,  the 
effects  of  social  expenditure  and  the  connection  between  social 
demand  and  production  were  so  slight  that  they  were  scarcely 
noticed. 

The  mediaeval  economists  therefore  were  confronted  with 
comparatively  simple  problems.  These  problems  they  attacked 
with  ability  and  with  some  degree  of  success.  It  was  not  long, 
however,  before  the  economic  conditions  changed,  bringing 
with  them  new  problems  and  fresh  attempts  at  analysis. 

50.   The  Mercantile  Doctrine. 

Modern  economics  may  be  said  to  date  from  the  close  of 
the  sixteenth  century.  This  century  is  marked  by  one  great 
fact  which  could  not  have  failed  to  arrest  attention,  —  the 
revolution  in  prices  which  went  hand  in  hand  with  the  intel- 


116  Economic  Thought.  [§50 

lectual  revolution  due  to  the  printing-press,  with  the  religious 
revolution  due  to  the  Reformation  and  with  the  political  rev- 
olution due  to  the  weakening  of  the  feudal  system.  The 
colonization  of  the  new  world  led  to  a  vast  influx  of  the 
precious  metals ;  the  discovery  of  the  trade  routes  to  the  East 
opened  up  new  channels  of  commerce  and  revivified  industry ; 
the  old  regime  of  customary  prices  slowly  gave  way  before  the 
new  force  of  competition ;  the  guild  system  broke  down  as 
the  power  of  capital  made  itself  more  apparent  and  as  industrial 
conditions  outgrew  the  narrow  limits  of  the  local  economy. 
Thinkers  like  Bod  in  in  France  and  Hales  in  England  began 
to  ponder  these  newer  conditions  of  economic  life  and  to 
discuss  the  relations  of  private  wealth  to  public  welfare.  The 
economic  theories  from  that  time  may  be  subdivided  into 
three  periods,  —  the  mercantile  theory,  which  first  sought  to 
crystallize  the  idea  of  the  national  economy;  the  theory  of 
Adam  Smith  and  Turgot,  which  represented  the  domination 
of  the  domestic  system  of  industry,  although  in  its  cosmopol- 
itan ideas  much  influenced  by  the  doctrines  of  the  Physiocrats  ; 
and  finally  the  Ricardian  theory,  which  marks  the  triumph  of 
the  factory  system. 

The  mediaeval  thinkers  had  centred  their  attention  on  the 
money  supply,  and  had  used  every  endeavor  to  bring  the  pre- 
cious metals  into  the  town  and  keep  them  there  by  controlling 
each  individual  bargain  through  manipulating  the  exchanges, 
and  similar  devices.  The  newer  school  of  economists  still 
emphasized  the  importance  of  the  money  supply,  but  owing  to 
the  changing  conditions  of  trade  were  enabled  to  recognize 
the  futility  of  the  old  measures.  According  to  them,  a  surplus 
of  coin  is  indeed  desirable,  but  it  can  best  be  secured  by  an 
excess  of  exports  over  imports  resulting  in  a  balance  of  trade 
rather  than  by  manipulating  the  exchanges  so  as  to  secure  a 
favorable  balance  in  each  particular  transaction  or  bargain. 
The  first  great  economic  controversies  were  those  between 
the  advocates  of  the  Balance  of  Bargain  and  Balance  of  Trade 
theories.  Because  of  their  insistence  on  this  mere  exchange 


§  50]  Mercantile  Doctrine.  117 

of  merchandise,  the  newer  writers  are  usually  called  the 
Mercantilists. 

In  truth,  however,  this  was  only  an  incidental  result  of  their 
teachings.  The  breakdown  of  the  local  economy  and  its 
replacement  by  the  larger  unit  led  thinkers  to  search  for 
the  true  causes  of  national  wealth  and  national  greatness. 
They  saw  that  this  could  be  attained  only  by  an  increase  of 
national  production ;  and  since  industrial  capital  was  now 
making  its  appearance,  they  emphasized  the  need  and  the 
value  of  national  industry.  Just  as  the  older  theory  was  dis- 
proved at  the  beginning  of  the  seventeenth  century  almost  at 
the  same  time  by  an  Englishman  (Mun),a  Frenchman  (Mont- 
chretien)  and  an  Italian  (Serra),  so  the  practical  policy  of 
national  expansion  and  the  abolition  of  the  local  restrictions 
on  trade  and  industry  were  pursued  by  statesmen  like  Sully  in 
France,  Cromwell  in  England  and  later  by  Frederick  the 
Great  in  Prussia. 

Judged  from  the  present  point  of  view,  the  error  of  the  Mer- 
cantilists lay  in  confounding  a  balance  of  exports,  over  imports 
with  a  surplus  of  production  over  consumption  (see  below, 
§200).  At  the  time  the  theory  was  first  formulated,  how- 
ever, an  increase  of  national  exports  was  indeed  the  most 
obvious  method  of  measuring  the  increase  of  national  produc- 
tion. In  the  early  stages  of  capitalist  enterprise  and  of  inter- 
national competition,  the  policy  of  national  protection  was 
suggested  as  a  means  of  national  industrial  growth  ;  but  this 
system  was  itself  an  advance  on  the  narrow  exclusiveness  of 
the  mediaeval  town.  The  Mercantilists  all  clamored  for  "  Free 
Trade,"  but  their  free  trade  meant  a  freedom  of  exportation, 
and  a  liberation  of  internal  trade  from  the  trammels  of  the 
local  economy.  The  enlightened  Mercantilists  looked  upon  an 
abundant  money  supply  not  as  the  cause,  but  as  the  result,  and 
therefore  as  the  best  indication,  of  industrial  growth  and 
national  prosperity. 

The  problems  which  confronted  the  economists  of  the  seven- 
teenth and  first  half  of  the  eighteenth  century  were  thus  prin 


1 1 8  Economic'  Thought.  [§  51 

cipally  problems  of  production  and  exchange,  from  the  point 
of  view  of  the  relation  of  government  to  the  social  structure. 
Hence  the  term  political  economy  began  to  be  used,  and 
considerable  progress  was  made  in  analyzing  the  problems  of 
trade.  The  problems  of  distribution,  however,  were  only  just 
beginning;  the  domestic  system  of  industry  was  differentiating 
a  wages  class ;  and  the  growth  of  industrial  capital  was  only 
slowly  bringing  into  view  the  recipients  of  profits  as  against 
the  recipients  of  the  rent  of  land.  The  slight  theory  that  we 
find  on  the  subject  is  incomplete  and  often  incorrect.  It  was 
difficult  for  the  writers  amid  these  half-developed  conditions  to 
go  beyond  the  surface  fact  that  low  wages  seemed  to  mean  low 
cost  and  therefore  successful  competition  with  other  countries. 
It  was  reserved  for  the  great  thinkers  toward  the  close  of  the 
eighteenth  century  to  voice  the  newer  ideas  on  production  and 
distribution  alike,  and  to  disclose  the  elements  of  public  pros- 
perity, suited  to  the  economic  age  in  which  they  wrote. 

51.   Adam  Smith  and  the  Physiocrats. 

If  we  were  to  sum  up  in  two  phrases  the  real  contribution  of 
Adam  Smith  to  economics,  it  would  be  the  theory  of  cosmo- 
politanism and  the  theory  of  distribution.  Of  these  the  one 
was  original,  the  other  partly  borrowed  ;  but  both  were  shaped 
by  his  economic  environment. 

The  statesmen  of  the  eighteenth  century  had  been  pushing 
the  Mercantilist  doctrines  to  an  extreme.  While  the  system  of 
national  economic  expansion  had  marked  an  advance  as  com- 
pared with  the  mediaeval  system,  the  time  soon  came  when  the 
centre  of  economic  interest  was  shifted  from  internal  to  exter- 
nal considerations ;  and  when  what  had  seemed  liberty  from 
the  one  point  of  view  now  from  the  other  appeared  to  be 
restriction.  In  certain  countries  at  least  the  disadvantages  of 
the  system  came  to  outweigh  its  benefits.  Just  as  the  guild 
system  had  originally  been  a  spur  to  industry,  but  had  ulti- 
mately become  a  drag  upon  it,  so  the  mercantile  system  of 
regulation  changed  from  a  boon  to  a  drawback.  The  advance 


§  Si]  Adam  Smith.  119 

had  consisted  in  emphasizing  the  national  idea ;  the  retrogres- 
sion consisted  in  accentuating  the  exclusive  idea.  In  the  well- 
meant  effort  of  the  legislator  to  further  industry,  he  often 
throttled  it.  The  government  now  interfered  with  everything, 
and  often  accomplished  less  than  nothing.  The  colonies, 
instead  of  strengthening  the  mother  country,  broke  loose 
entirely  or  weakened  her.  Trade  was  conducted  on  the 
principle  that  what  one  nation  gained  the  other  necessarily 
lost. 

The  very  expansion  of  international  relations,  however,  and 
the  immense  growth  of  the  foreign  market  induced  the  eigh- 
teenth-century thinkers  to  take  a  broader  view.  Adam  Smith 
and  the  Physiocrats,  each  influenced  by  the  doctrine  of  Natural 
Law,  endeavored  to  show  that  economic  phenomena,  like  all 
others,  were  reducible  to  principle.  The  most  important  cor- 
ollaries of  natural  law  were  to  them  private  property  and 
individual  liberty.  The  liberty  whose  economic  aspect  they 
emphasized  consisted  of  complete  freedom  in  internal  industry 
and  in  external  trade.  The  demand  for  freedom  of  industry 
no  longer  meant  freedom  from  the  action  of  local  government, 
but  freedom  from  the  action  of  national  government  as  well ; 
the  demand  for  freedom  of  trade  no  longer  meant  liberty  of 
export,  but  liberty  of  import  as  well.  Just  as  it  was  recognized 
that  the  various  provinces  of  a  nation  benefited  from  freedom  of 
exchange  among  each  other,  so  it  was  claimed  that  the  various 
nations  of  the  world  would  equally  benefit.  Instead  of  national 
exclusiveness,  economists  demanded  cosmopolitan  freedom. 
Under  the  influence  of  the  natural  law  each  nation  would  then 
derive  its  maximum  advantage. 

This  importance  of  the  natural  law  of  freedom  in  economics 
was  emphasized  by  both  Adam  Smith  and  the  Physiocrats. 
Although  the  Physiocrats  were  first  in  the  field  with  the  pub- 
lished system  —  the  word  Physiocracy  denotes  "  the  rule  of 
nature  " — Adam  Smith  taught  the  identical  ideas  at  about  the 
same  time  in  his  lectures  at  Glasgow.  The  doctrine  of  cosmo- 
politanism was  in  the  air. 


120  Economit  Thought.  [§  51 

The  other  great  theory  —  that  of  distribution  —  we  owe 
primarily  to  the  Frenchmen ;  not  so  much  indeed  to  the  Physi- 
ocrats as  to  the  great  statesman,  economist  and  philosopher, 
who  was  only  a  half- Physiocrat  himself,  — Turgot.  The  leader 
of  the  Physiocrats  —  Quesnay,  the  court  physician  —  struck  by 
the  abyss  between  the  luxurious  noble  and  the  squalid  peasant, 
concluded  that  agriculture  was  the  only  source  of  wealth,  and 
the  peasant  the  only  productive  member  of  society.  In  an 
age  of  periodical  famine  the  food  supply  seemed  to  him  of 
transcendent  importance.  Turgot  only  half  accepted  this  idea ; 
but  taking  his  cue  from  the  Physiocrats  with  their  idea  of 
natural  law  and  their  effort  to  trace  the  final  distribution  of  the 
wealth  created  by  the  farmer,  he  analyzed  industrial  society  as 
he  found  it,  and  saw  that  the  product  of  industry  was  divided 
into  separate  shares.  We  now  for  the  first  time  have  a  theory 
of  capital,  a  theory  of  rent,  a  theory  of  interest  and  profits,  a 
theory  of  wages. 

This  theory  was  adopted  and  developed  by  Adam  Smith. 
He  rejected,  indeed,  the  doctrine  of  the  Physiocrats  that  agri- 
culture alone  yields  a  net  product.  On  the  contrary,  he 
generalized  the  conception,  and  maintained  that  all  industry 
might  yield  a  product.  Thus  we  often  speak  of  Smith  as  the 
founder  of  the  industrial  system  of  economic  theory  as  against 
the  agricultural  system  of  the  Physiocrats.  But  the  funda- 
mental doctrines  of  Smith  in  respect  to  the  laws  of  distribu- 
tion were  similar  to  those  of  Turgot.  Both  Turgot  and  Smith 
lived  in  the  midst  of  the  domestic  system  of  industry.  This 
was  more  developed  in  England  than  in  France,  where  the 
abuses  of  the  guild  system  still  lingered  and  where  agricul- 
ture was  more  important  than  industry.  Thus  we  find  Turgot 
sharing  in  some  points  the  views  of  the  Physiocrats,  while  Adam 
Smith  was  able  in  part  to  cut  himself  loose.  Turgot  and  Smith, 
however,  attempted  to  explain  the  laws  of  rent,  profits  and 
wages,  because  now  for  the  first  time  the  capitalist  employer 
was  differentiated  from  the  landlord,  and  because  the  wages 
class  had  assumed  a  new  importance.  The  laborer,  however, 


§  52]  Ricardo.  121 

still  controlled  the  process  of  production ;  the  "  manufacturer  " 
with  Adam  Smith  is  still  the  manual  worker. 

Adam  Smith,  as  also  to  a  less  extent  Turgot,  may  therefore  be 
called  the  theorist  of  the  domestic  system.  He  differs  from  the 
Physiocrats  in  accentuating  the  industrial  rather  than  the  agri- 
cultural element  in  wealth  and  production ;  but  he  agrees  with 
them  in  emphasizing  the  cosmopolitan  rather  than  the  national 
elements  in  public  wealth.  Because  of  this  broader  view  they 
both  attempt  for  the  first  time  to  study  the  whole  range  of 
relations  between  private  property  and  public  wealth,  between 
liberty  and  industry. 

52.   Ricardo  and  Modern  Economics. 

Adam  Smith  wrote  on  the  eve  of  the  industrial  revolution. 
It  has  often  been  observed  that  the  year  1776  marked  the 
publication  of  the  Wealth  of  Nations  and  the  Declaration  of 
Independence,  thus  voicing  the  demand  for  liberty  in  industry 
as  well  as  in  politics.  But  it  is  equally  worthy  of  note  that  the 
same  year  witnessed  Watt's  great  discovery  of  the  steam-engine. 
It  took  several  decades  for  this  and  other  great  inventions  to 
change  the  aspect  of  the  industrial  world  ;  but  in  less  than  half 
a  century  the  transition  had  been  accomplished  in  the  leading 
industries  of  England,  and  was  making  rapid  strides  in  the 
others.  In  France  the  process  had  scarcely  begun;  in  the 
other  continental  countries  the  domestic  system  itself  was  still 
contesting  the  guild  system.  Hence  the  thinker  who  could 
analyze  the  new  system  of  industry  could  be  sought  for  only 
in  England,  for  in  no  other  country  did  that  system  exist. 
Ricardo  was  the  first  theorist  of  the  factory  system. 

It  is  no  mere  coincidence  that  Ricardo  should  have  been  a 
stockbroker.  This  man  of  genius,  whose  daily  life  trained  him 
to  observe  the  almost  perfect  sway  of  competition  and  the  well- 
nigh  complete  fluidity  of  capital  on  the  exchange,  was  well 
calculated  to  apply  these  considerations  to  a  wider  industrial 
world,  whose  characteristics  were  coming  to  be  those  of  free 
competition  and  the  supremacy  of  capital.  Starting  with  a 


122  Economic  Thought.  [§  52 

study  of  the  money  question,  Ricardo  ended  with  an  analysis 
of  industrial  society.  The  theories  of  cosmopolitanism  and 
liberty  he  took  from  Adam  Smith,  but  he  developed  them 
further,  because  this  theory  of  free  competition  seemed  to  be 
even  more  applicable  to  the  factory  system  than  to  the  domestic 
system.  The  former  theory  of  distribution,  however,  no  longer 
quite  sufficed.  The  manufacturer  was  now  not  the  manual 
worker,  but  the  employer  who  did  no  manual  work.  The 
"  moneyed  interest,"  which  in  Smith's  time  was  only  slowly 
forging  to  the  front,  was  now  becoming  the  dominant  factor  in 
English  life.  The  antagonism  between  land  and  capital  led  to 
a  new  analysis  of  rent  in  contrast  to  profits.  The  mass  of  the 
working  population  had  become  wage-earners,  but  England's 
growing  prosperity  seemed  to  rest  on  the  development  of 
capital.  Hence  the  law  of  wages  was  re-analyzed,  in  terms  of 
profit,  and  the  acme  of  truth  seemed  to  be  realized  in  the 
statement  that  wages  and  profits  vary  inversely  to  each  other. 
Moreover,  since  capital  had  now  assumed  a  new  importance  in 
the  shape  of  machinery,  the  study  of  capital  became  largely  a 
siudy  of  the  economic  effects  of  machinery.  Everywhere  in 
the  civilized  world  of  to-day  the  study  of  the  theory  of  indus- 
trial phenomena  goes  back  to  the  analysis  of  Ricardo. 

The  Ricardian  doctrines  themselves,  however,  have  been 
modified  in  some  points  by  recent  investigation.  It  would  be 
surprising  if  the  century  that  has  elapsed  since  Ricardo  wrote 
should  not  have  brought  about  changes  in  conditions  which 
were  soon  reflected  in  theory.  In  some  respects  the  theories 
have  been  amplified  rather  than  altered.  The  economic  life  of 
the  last  half-century  has  been  marked  by  three  great  facts,  — 
the  increased  consumption  of  the  masses,  the  revolution  in  the 
means  of  transportation  and  the  tendency  of  capital  toward 
concentration.  The  changes  in  consumption  have  led  to  a 
deeper  analysis  of  the  central  problem  of  value,  especially 
through  the  efforts  of  Jevons  and  the  Austrian  school.  The 
revolution  in  the  means  of  transportation  has  given  free  scope 
to  the  force  of  speculation,  and  has  led  to  its  more  careful 


§52]  Modern  Economics.  123 

study.  The  growth  of  capital  has  produced  not  only  large- 
scale  industry,  but  integrated  industry,  and  has  brought  about 
a  closer  scrutiny  of  the  monopoly  problem. 

In  other  respects,  however,  the  theory  has  been  modified 
rather  than  amplified.  The  Ricardian  doctrine  of  free  compe- 
tition and  natural  liberty  had  two  important  practical  corolla- 
ries :  the  one  as  applied  to  internal  affairs  meant  laissez-faire 
or  non-interference  by  government ;  the  other  as  applied  to 
foreign  affairs  meant  free  trade.  The  experience  of  the  nine- 
teenth century  has  conclusively  shown  that  both  these  demands 
are  of  relative  rather  than  absolute  validity,  and  that  under 
certain  conditions  they  may  prove  detrimental  rather  than 
beneficent.  This  has  led  to  a  fresh  analysis  of  the  theories  of 
liberty  and  competition,  more  suited  to  the  modern  changes. 

Above  all,  however,  the  complete  triumph  of  industrialism, 
which  was  in  its  infancy  when  Ricardo  wrote,  has  brought  into 
clear  relief  many  tendencies  which  were  then  scarcely  discern- 
ible. Ricardo  had  elucidated  the  law  of  rent,  but  his  theory 
of  profits  was  incomplete,  the  connection  between  interest  and 
profits  dimly  appreciated,  and  the  relation  of  both  to  rent  not 
clearly  apprehended.  Above  all,  the  position  of  the  laborer 
and  the  relation  of  wages  to  profits  were  not  thoroughly  grasped. 
In  the  first  flush  of  the  new  regime  the  function  of  the  capitalist 
was  naturally  overestimated,  and  an  undue  emphasis  put  on 
production.  So  far  as  social  reform  was  deemed  at  all  practi- 
cable, it  was  thought  to  depend  on  the  prosperity  of  the  capi- 
talist and  the  care  taken  by  the  laborers  to  marry  late  and  have 
small  families. 

It  was  the  social  discontent  of  the  middle  of  the  century 
which  was  responsible  for  a  change.  Karl  Marx  did  an  admi- 
rable work  in  showing  the  essential  relativity  of  economic 
institutions  and  in  pointing  out  the  influence  of  economic  facts 
upon  social  and  political  life  ;  and  his  keen  criticism  of  existing 
theory  and  actual  society  did  much  to  bring  about  a  revision  of 
the  laws  of  distribution.  While  the  socialist  criticism,  however, 
was  fruitful,  its  constructive  analysis  was  erelong  seen  to  be  as 


124  Economic  Thought.  [§  52 

one-sided  as  the  one  which  it  had  endeavored  to  replace.  It 
has  been  reserved  for  recent  economic  theory,  especially  in  the 
works  of  Marshall,  Walker,  Clark  and  their  followers,  to  take 
the  saner  view  and  to  show  how  and  why  social  progress  and 
the  growth  of  capital  are  intimately  bound  up  with  the  advance 
of  the  mass  of  the  workers.  Thus  the  modern  theory  of  eco- 
nomic life  fits  in  not  only  with  the  facts  of  the  business  world 
but  with  the  demands  of  social  reform.  The  economics  of 
to-day  has  finally  reached  the  stage  where  it  seeks  to  retain  the 
cold  impassivity  of  science  and  yet  to  reflect  the  warm  glow  of 
human  interests  and  living  ideals. 


Book  III. 

Conditions  of  Economic  Life. 


CHAPTER   IX. 
PRIVATE   PROPERTY. 

53.  References. 

C.  Letourneau,  Property,  its  Origin  and  Development  (1901);  E.  de 
Laveleye,  Primitive  Property  (trans,  by  Marriott,  1878) ;  F.  de  Coulanges, 
Origin  of  Property  in  Land  (trans,  by  Ashley,  1891) ;  E.  Jenks,  History  of 
Politics  (1900),  ch.  x;  H.  S.  Maine,  Ancient  Law  (1880),  ch.  viii,  and 
Village  Communities  (1881),  Lects.  3,  6;  E.  Kelly,  Government  or  Human 
Evolution,  II  (1901),  bk.  i,  ch.  iii ;  J.  S.  Nicholson,  Principles  of  Political 
Economy  (1893),  bk.  ">  cn-  "  5  F-  Seebohm,  The  English  Village  Com- 
munity (2cl  ed  ,  1883) ;  F.  W.  Maitland,  Domesday  Book  and  Beyond 
(1897)  ;  J.  Johnson,  Rudimentary  Society  among  Boys  (Johns  Hopkins 
Univ.,  Studies,  II,  1884) ;  G.  B.  Newcomb,  Theories  of  Property  (Pol. 
Sci.  Quart.,  I,  1886) ;  E.  Demolins,  Comment  la  Route  cree  le  Type  Social 
(2  vols.,  1900-1903)  ;  L.  Felix,  Entwickelungsgeschichte  des  Eigenthums 
(4  vols.,  1883-1896). 

54.   Origin  of  Private  Property. 

The  institution  of  private  property  lies  at  the  basis  of  modern 
economic  life.  It  has  become  so  ingrained  into  our  modes  of 
thought  that  we  commonly  regard  it  as  a  natural  right.  Never- 
theless private  property,  like  every  other  economic  institution, 
is  the  result  of  a  long  evolution.  It  is  a  relative  rather  than 
an  absolute  category. 

In  the  early  stages  of  society  the  conception  of  private  prop- 
erty is  absent.  Primitive  man,  like  his  brute  ancestor,  seized, 

'25 


1 26  Private'  Property.  [§  54 

but  soon  consumed,  his  articles  of  food.  Even  when  he  learned 
to  provide  for  the  morrow,  and  like  some  animals  to  accumu- 
late a  store  of  provisions,  he  was  able  to  retain  control  of  them 
only  so  long  as  no  stronger  savage  came  his  way.  There  may 
have  been  temporary  possession,  there  was  no  recognized 
ownership.  The  earliest  idea  of  property  as  distinct  from 
possession  was  communal,  not  private.  As  the  human  hordes 
roamed  about  from  place  to  place  in  the  quest  of  food,  they 
came  to  regard  certain  sections  as  their  particular  preserves, 
into  which  no  other  savages  were  admitted.  Appropriation 
and  user  thus  became  the  germs  of  property,  but  it  was  social 
and  not  .individual  user.  As  concerted  action  was  generally 
necessary  in  order  to  secure  subsistence,  the  food  was  distrib- 
uted according  to  definite  rules  by  the  representatives  of  the 
group.  Even  religious  objects,  like  sacred  stones  and  feathers, 
were  preserved  by  the  group  as  a  whole. 

The  first  type  of  private  property  is  found  in  the  ornaments 
and  the  scanty  articles  of  clothing.  These  were  almost  from 
the  outset  regarded  as  an  integral  part  of  the  personality  of 
the  individual.  The  next  step  was  reached  when  certain 
weapons  were  taken  out  of  the  general  stock  and  associated 
with  the  exceptional  prowess  of  some  member  of  the  group. 
The  weapons,  like  the  ornaments,  were  supposed  in  some  way 
to  reflect  the  personality  of  the  individual,  and  when  he  died 
they  were  usually  burned  or  interred  with  his  remains.  As 
civilization  reached  a  higher  stage,  the  movable  shelters  or 
wigwams  and  the  scanty  stock  of  tools  and  utensils  were  re- 
tained in  the  ownership  of  individuals.  We  can,  however, 
scarcely  yet  speak  of  any  differentiation  of  private  property. 
Its  social  importance  was  insignificant  in  the  extreme,  and 
there  was  no  motive  for  accumulation.  After  a  narrow  limit 
had  been  reached,  additional  ornaments  became  a  burden, 
more  weapons  and  tools  were  valueless.  The  group,  not  the 
individual,  efforts  were  still  the  controlling  factors  in  the  eco- 
nomic life. 

The  decisive  step  was  taken  with  the  domestication  of  ani- 


§54]  Origin.  127 

mals.  As  soon  as  it  was  discovered  how  to  preserve  flocks 
and  herds,  it  was  possible  for  the  individual  to  dissociate  his 
economic  life,  to  a  small  extent  at  least,  from  that  of  the 
group,  and  by  giving  freer  rein  to  his  own  powers  to  start  on 
the  path  of  independence  and  prosperity  for  himself  and  his 
own  immediate  circle.  Private  property  now  assumed  a  posi- 
tion of  increasing  importance  :  it  created,  as  we  have  seen, 
the  patriarchal  family,  and  it  engendered  the  distinction  of 
rich  and  poor.  Wealth  now  consisted  of  flocks  and  herds ; 
personal  belongings  in  the  shape  of  jewelry  and  treasure  were 
prized  not  only  for  themselves  but  because  they  could  be  bar- 
tered for  live  stock.  The  original  "chattels"  are  the  "cattle." 
Human  dependents,  moreover,  were  needed  to  care  for  this 
increasing  wealth  :  the  wives  and  the  children  of  the  patri- 
archal head  were  regarded  as  his  private  property,  and  where 
even  these  did  not  suffice,  we  find  the  beginnings  of  slavery. 
The  slave  (fame/)  soon  became  the  most  important  element 
in  the  family.  On  the  other  hand,  there  was  no  private  appro- 
priation of  land,  because  it  was  unnecessary.  The  herdsmen 
wandered,  according  to  seasonal  or  climatic  conditions,  in 
search  of  fresh  pastures,  and  the  tribal  customs  were  still  suffi- 
ciently strong  to  prevent  individuals  from  appropriating  par- 
ticularly favored  spots  in  the  general  area. 

Two  points  thus  stand  out  clearly.  First,  private  property 
consisted  for  a  long  time  only  of  movables,  animate  or  inani- 
mate, that  is,  of  animals,  human  beings,  and  personal  chattels. 
A  community  which  is  continually  on  the  march  cannot  de- 
velop property  in  immovables.  Secondly,  the  origin  of  private 
property  is  to  be  sought  in  user  and  seizure.  Compulsion  and 
even  rapine  are  frequently  the  starting-points  of  the  accumula- 
tion of  wealth.  Yet  this  selfish  accumulation  is  the  means  of 
attaining  a  higher  stage  of  welfare  for  the  community  as  a 
whole.  It  increases  not  only  production  but  civilization.  The 
ethical  stage  of  a  pastoral  tribe  is  superior  to  that  of  a  group 
of  hunters.  The  institution  of  private  property,  while  intensi- 
fying many  of  the  unlovely  characteristics  of  human  nature,  is 


128  Private-  Property.  [§55 

also  responsible  for  those  qualities,  like  thrift,  foresight,  fru- 
gality, energy,  sobriety  and  sanity,  without  which  no  enduring 
progress  was  possible.  Property  was  becoming  private,  but 
since  the  individual  was  still  in  large  measure  controlled  by 
the  group,  the  sanction  of  private  property  remained  social 
in  character.  The  individual  was  permitted  to  enjoy  private 
property  because  it  was  recognized  to  be  conducive  on  the 
whole  to  the  interests  of  the  group.  From  the  very  beginning, 
therefore,  out  of  evil  there  came  good  ;  out  of  the  violence 
inseparable  from  early  private  property  there  evolved  the 
orderliness  of  a  stable  society. 

55.  Growth  of  Property  in  Land. 

The  next  step  was  taken  when  the  developed  agricultural 
stage  was  ushered  in.  This  had  two  important  results :  it 
greatly  extended  slavery,  and  it  created  private  property  in 
immovables.  It  extended  slavery,  because  profitable  cultiva- 
tion of  the  soil  was  contingent  upon  an  adequate  labor  force. 
Compulsory  and  gratuitous  labor  would  naturally  swell  the 
gains  of  the  owner.  Increasing  agriculture  involved,  under 
certain  conditions  at  least,  increasing  private  property  in 
slaves. 

It  also  involved  the  creation  of  private  property  in  immov- 
ables. As  fixed  settlements  replaced  the  early  temporary 
abodes,  the  need  and  utility  of  more  durable  habitations  be- 
came evident.  Private  property  in  houses,  however,  rendered 
possible  on  a  much  larger  scale  the  accumulation  of  personal 
belongings  within  the  house,  and  this  accumulation  of  wealth 
was  brought  about  by  the  increased  earnings  of  agriculture  as 
contrasted  with  flock  tending.  The  evolution  of  private  prop- 
erty in  land,  however,  was  far  slower  than  in  the  case  of  houses. 
In  a  few  instances,  where  geographical  and  climatic  reasons 
made  it  difficult  for  the  pastoral  group  to  eke  out  a  living  in 
common  from  the  soil,  as  in  Norway,  and  where  there  was  less 
fear  of  attack  from  organized  bands  of  marauders,  the  indi- 
viduals started  out  as  farmers,  each  for  himself  and  each 


§  55]  Property  in  Land.  129 

appropriating  as  much  of  the  land  as  he  needed.  User  soon 
hardened  into  ownership.  So  also  when  new  colonies  were 
planted  by  the  offshoots  of  communities  long  acquainted  with 
agriculture,  the  colonists,  as  in  America,  naturally  brought 
with  them  the  practice  of  individual  land  ownership  and  sepa- 
rate holdings.  In  most  places,  however,  where  the  grazier 
slowly  turned  into  a  farmer,  the  communal  practices  dis- 
appeared only  by  slow  degrees.  Just  as  the  nomad  group 
had  pitched  its  tents  together  and  had  allowed  the  flocks  to 
graze  in  common,  so  now  the  village  houses  were  grouped  and 
separate  plots  of  land  in  the  surrounding  area  were  temporarily 
assigned  to  the  cultivators.  These  temporary  assignments  of 
different  grades  soon  became  permanent,  although  the  method 
of  using  them  was  strictly  subject  to  communal  needs.  For  as 
population  increased  and  the  holdings  were  subdivided,  the 
different  grades  of  land  were  carved  up  into  strips,  the  same 
individual  often  possessing  sections  in  different  parts  of  the 
arable  area.  This  system  of  intermixed  strips  necessitated  a 
whole  body  of  communal  rules  in  order  to  insure  a  proper 
cultivation.  The  strips  were  too  small  to  be  fenced  off.  In 
the  open  field  system,  as  it  was  therefore  called,  not  only  was 
it  clearly  inadmissible  for  one  man  to  use  his  strip  as  pasture 
with  the  risk  that  his  animals  might  stray  on  the  cultivated  plot 
of  his  neighbor,  but  in  addition  far  better  results  were  obtained 
by  planting  large  areas  in  the  same  way.  Thus  the  mediaeval 
village  community  or  mark  was  based  on  the  idea  of  common 
cultivation,  and  the  original  community  of  property  was  long 
preserved  not  only  in  the  forests,  the  free  use  of  which  under 
certain  restrictions  belonged  to  every  member  of  the  group, 
but  also  in  the  pasture  land,  where  every  one  had  the  right  to 
graze  his  cattle,  and  even  in  the  arable  land  which,  after  the 
crops  were  taken  off,  reverted  to  communal  use. 

While  private  property  in  land  within  the  group  was  thus 
developing,  there  was  another  element  at  work,  proceeding 
from  above  rather  than  from  below.  As  the  conquering  tribes 
seized  upon  fresh  tracts,  it  became  of  signal  importance  to 

9 


130  Private'  Property,  [§55 

defend  the  settled  agricultural  possessions.  This  duty  was 
assigned  to  the  military  chieftains,  who  in  many  cases  were 
the  wealthiest  flock-owners.  With  the  transition  to  agricul- 
ture, the  old  personal  and  tribal  relations  gave  way  to  territorial 
and  political  relations.  In  other  words,  the  state  developed 
and  the  local  divisions  and  counties  were  put  under  the  pro- 
tection of  the  over-lords.  The  tenants,  or  vassals,  whether 
individuals  or  groups,  now  paid  a  portion  of  their  agricultural 
earnings  as  the  price  of  protection,  and  the  military  occupa- 
tion of  the  district  by  the  chieftain  before  long  hardened  into 
the  institution  of  private  property.  The  war  lord  became 
the  landlord.  The  marquis  was  originally  the  defender  of  the 
"  March."  The  property  rights  of  the  cultivator  were  held  to 
be  subordinate  to  those  of  the  lord.  Thus  was  ushered  in 
the  system  of  feudalism,  based  on  the  preponderance  of  the 
manorial  lord  and  the  hierarchy  of  social  relations. 

In  some  cases  the  cultivators  lost  their  original  prerogatives 
and  dwindled  into  mere  tenants  without  any  property  rights 
at  all.  In  other  cases  they  contrived  gradually  to  free  them- 
selves from  their  rents  and  other  feudal  payments,  while  at 
the  same  time  the  common  cultivation  gave  way,  under  the 
impulse  of  more  modern  methods,  to  individual  tillage.  In 
this  manner  was  formed  the  peasant  proprietorship  of  many 
European  countries.  The  land  became  thus  the  private  prop- 
erty of  either  the  lord  or  the  peasant,  until  finally  with  the 
development  of  industrial  capitalism  real  estate  was  put  on  an 
equality  with  personal  property.  In  America  and  many  parts 
of  Europe  land  is  now  bought  and  sold  almost  as  readily  as 
any  kind  of  chattels. 

Here  again  we  notice  the  social  sanction  of  private  property. 
The  origin  of  property  in  land  as  of  that  in  flocks  was  often 
connected  with  force  and  fraud,  but  in  this  case  as  the  other 
the  community  as  a  whole  was  benefited.  The  private  prop- 
erty of  the  feudal  chieftain  meant  the  growth  of  security  and 
social  order,  which  formed  the  foundations  of  increased  pro- 
duction. The  development  of  landed  property  within  the 


§56]  Theories.  131 

communal  group  of  cultivators  was  the  result  of  the  recognition 
of  the  social  importance  of  individual  action.  As  long  as 
common  cultivation  brought  about  the  best  utilization  of  the 
fields,  it  remained  the  prevalent  system ;  but  when  in  more 
recent  periods  the  application  of  capital  to  land  made  an 
intensive  cultivation  possible,  the  advantages  of  a  more  individ- 
ual method  were  soon  manifest.  The  old  common  or  open 
fields  were  now  enclosed,  and  each  landowner,  freed  from  what 
had  become  the  shackles  of  a  common  cultivation,  turned 
his  own  plot  to  the  best  use.  Private  property  in  land  thus 
reached  its  climax,  because  it  carried  with  it  individual  free- 
dom of  use.  The  augmented  agricultural  profits  were  due  to 
increased  production,  so  that  private  property  here  again  re- 
dounded in  the  main  to  the  advantage  of  the  community. 
Real  estate  like  personalty,  immovables  like  movables,  have 
become  private  property  because  of  the  recognition  by  society 
of  the  social  advantages  of  individual  ownership. 

56.  Theories  of  Private  Property. 

Two  important  corollaries  follow  from  what  has  just  been 
said  :  first,  the  justification  of  private  property  is  its  social 
utility,  and  second,,  the  extent  of  private  property  rights  must 
always  be  limited  by  their  social  consequences. 

The  earliest  theory  of  private  property  as  found  in  some  of 
the  Roman  writers  is  the  occupation  theory.  The  doctrine 
that  property  belongs  of  right  to  him  who  first  seizes  it  is,  how- 
ever, one  that  can  apply,  if  at  all,  only  to  the  earliest  stages  of 
development.  Where  no  one  has  any  interest  in  the  property, 
no  one  will  object  to  the  assertion  of  a  claim  by  a  new-comer. 
When  property  is  without  any  discoverable  owner,  we  still  to- 
day assign  it  to  the  lucky  finder.  But  when  the  property  is 
already  utilized  by  others,  whether  as  groups  or  as  individuals, 
or  when  the  property  is  newly  created  by  human  effort,  the 
assertion  of  the  right  of  occupation  involves  a  theory  of  force 
rather  than  of  justice.  The  occupation  theory  may  explain 
how  the  present  legal  title  to  certain  forms  of  property  origi- 


132  Private 'Property.  [§  56 

nated;  it  cannot  serve  as  a  justification  of  private  property, 
except  in  the  rare  case  of  previously  unoccupied  or  unutilized 
wealth.  The  mere  fact  that  a  person  has  seized  a  thing  is  no 
reason  why  he  should  retain  it. 

The  next  doctrine  was  the  natural  rights  theory.  Private 
property,  so  we  were  told  by  the  philosophers  of  antiquity 
and  the  publicists  of  the  later  middle  ages,  is  a  natural  right,  a 
part  of  the  law  of  nature.  It  will  at  once  be  asked,  however, 
what  is  denoted  by  nature  ?  If  by  nature  we  mean  the  physical 
and  animal  world  outside  of  man,  it  is  clear  that  the  only  laws 
of  nature  are  the  laws  of  the  necessary  relations  of  phenomena 
and  that  the  only  natural  right  is  that  which  flows  from  the  law 
of  might  or  of  the  power  which  explains  these  phenomena.  In 
this  sense  all  civilization  is  an  endeavor  to  escape  from  the 
original  reign  of  natural  law  among  brutes.  Nature  is  here 
opposed  to  human  progress.  Private  property,  then,  is  un- 
natural because  it  is  not  found  in  a  state  of  nature.  If,  on  the 
other  hand,  by  nature  we  mean  the  constitution  of  the  entire 
universe,  including  man,  and  if  it  is  contended  that  private 
property  is  natural  in  the  sense  that  it  is  necessary  to  the  full 
self-realization  of  the  individual  as  the  bearer  of  the  world  idea, 
the  obvious  rejoinder  is  that  we  are  applying  the  term  natural 
right  to  our  temporary  idea  of  what  ought  to  be  right,  and  that 
history  unmistakably  shows  a  continual  change  in  our  ideas  of 
what  ought  to  be.  The  great  philosophers  of  antiquity  upheld 
private  property  in  slaves  as  a  natural  right.  Much  of  what 
we  to-day  consider  natural,  our  descendants  will  deem  un- 
natural. Our  conception  of  nature  in  this  sense  is  essentially 
ephemeral  and  mutable. 

Driven  from  this  position,  the  natural  rights  school  took 
refuge  in  the  labor  theory,  and  maintained  that  the  real  title  to 
private  property  is  derived  from  the  toil  and  trouble  experi- 
enced in  creating  it.  Surely,  it  will  be  said,  a  thing  belongs  of 
right  to  him  who  produces  it.  But  at  once  comes  the  reply  : 
no  one  has  created  the  land.  As  a  consequence,  we  find 
thinkers  of  all  ages,  from  Phaleas  of  antiquity  to  the  disciples 


§  56]  Theories.  133 

of  Henry  George  to-day,  who  contend  that  private  property 
in  land  is  unjust,  while  maintaining  that  private  property  in 
everything  else  is  defensible.  These  critics,  however,  overlook 
the  fact  that  the  difference  between  land  and  so-called  labor 
products  is  in  this  respect,  at  all  events,  one  only  of  degree, 
because  nothing  is  the  result  of  individual  labor  alone.  The 
carpenter,  it  is  said,  rightfully  owns  the  table  which  he  has 
made.  But  to  what  extent  has  he  made  it?  The  tree  which 
affords  him  the  raw  material  was  not  created  by  him ;  the  axe 
with  which  the  tree  is  felled  is  the  accumulated  result  of 
centuries  of  invention  expended  by  his  ancestors ;  the  stream 
along  which  the  log  is  floated  is  not  of  his  making.  To  pass 
over  all  the  other  intermediate  processes,  how  long  would  he 
be  secure  in  the  possession  of  the  tools  he  has  used  or  of 
the  product  he  has  finished,  were  it  not  for  the  protection 
afforded  to  him  by  the  law?  And  finally,  of  what  use  would 
the  tables  be  unless  there  were  a  demand  for  them  on  the  part 
of  the  community?  The  value  of  the  table  is  as  little  the  result 
of  individual  labor  as  is  the  value  of  the  land.  Society  holds 
a  mortgage  over  everything  that  is  produced  or  exchanged. 

Since  therefore  neither  occupation,  natural  law  nor  labor 
gives  an  indefeasible  title  to  private  property,  some  philoso- 
phers were  led  to  frame  the  so-called  legal  theory  of  private 
ownership  which  is  in  essence  that  whatever  is  recognized  as 
such  by  the  law  is  rightfully  private  property.  Obviously,  how- 
ever, this  is  not  an  economic  doctrine.  Good  law  may  be 
bad  economics.  The  law  generally  follows  at  a  respectful 
distance  behind  the  economic  conditions,  and  adjusts  itself 
gradually  to  them.  The  legal  theory  tells  us  what  property 
is,  not  why  it  is,  nor  what  it  should  be. 

Thus  we  are  finally  driven  to  the  social  utility  theory.  This 
is  really  implied  in  the  preceding  theories  and  supplies  the  link 
that  binds  them  all  together.  In  ancient  as  in  modern  com- 
munities, the  individual  is  helpless  as  against  society,  however 
much  under  modern  democracy  society  may  see  fit  to  extend 
the  bounds  of  individual  freedom.  If  we  allow  the  individual 


1 3  4  Private  Property.  [§57 

to  seize  upon  unoccupied  wealth,  if  we  recognize  the  existence 
of  certain  rights  in  what  are  deemed  to  be  the  products  of 
labor,  if  we  throw  the  mantle  of  the-  law  around  the  elements 
of  private  property,  —  in  every  case  society  is  speaking  in  no 
uncertain  voice  and  permits  these  things  because  it  is  dimly 
conscious  of  the  fact  that  they  redound  to  the  social  welfare. 
Private  property  is  an  unmistakable  index  of  social  progress. 
It  originated  because  of  social  reasons,  it  has  grown  under  con- 
tinual subjection  to  the  social  sanction.  It  is  a  natural  right 
only  in  the  broad  sense  that  all  social  growth  is  natural. 

57.  Limits  of  Private  Property. 

If  then  social  utility  is  the  real  justification  of  private  prop- 
erty, it  is  clear  that  the  extent  of  private  property  rights  must 
find  its  limit  in  social  considerations.  Take,  for  example,  the 
modern  problem  of  irrigation.  The  English  common-law 
conception  of  private  property  —  the  property  that  reaches, 
as  has  been  picturesquely  said,  from  heaven  to  hell  —  is  a 
product  of  a  moist  climate,  of  conditions  where  there  is  an 
abundance  or  superabundance  of  water,  and  where  private 
interest  could  be  safely  depended  upon  to  give  the  best 
results.  But  in  the  arid  and  semi-arid  regions  of  our  western 
empire  neither  occupation  nor  labor  is  deemed  to  give  an 
equitable  title  to  the  river  or  the  adjacent  riparian  lands. 
The  new  code  of  private  property  which  is  springing  up  in 
the  West  is  one  in  which  individual  rights  are  clearly  and 
forcibly  held  subservient  to  those  of  the  community. 

What  is  true  of  irrigable  land  in  the  West  is  true  in  varying 
degree  of  many  forms  of  private  property  in  the  East.  "  May 
I  not  do  as  it  listeth  me  with  my  own  ?  "  is  a  cry  far  less  fre- 
quently heard  than  of  old.  Private  property  as  a  concept 
will  no  doubt  always  remain  ;  but  the  content  of  the  concept 
is  continually  changing.  Property  in  human  beings  was  at 
one  time  considered  economically  advantageous  and  morally 
defensible.  Private  ownership  of  the  highways  was  not  so  long 
ago  usual  and  justifiable.  In  the  city  of  New  York  to-day  the 


§57]  Limits.  135 

process  of  extinction  of  private  property  in  docks  is  fast  going 
on.  On  the  other  hand,  the  stealing  of  electricity  or  the 
tapping  of  a  telegraph  or  telephone  wire  is  at  present  punish- 
able as  theft.  If,  as  Carlyle  tells  us,  no  one  believes  what  his 
grandfather  believed,  we  may  almost  say  that  no  one  owns 
what  his  grandfather  owned. 

The  right  of  private  property  is  a  privilege  conferred  upon 
individuals  by  society.  It  is  recognized  as  beneficial  in  general 
because  of  the  consensus  of  opinion  that  in  the  main  better 
economic  results  can  be  secured  by  the  application  of  the 
principle  of  self-interest.  In  the  present  stage  of  the  evolution 
of  human  nature,  private  property  constitutes  the  chief  incen- 
tive to  better  and  greater  production.  The  test  therefore  is 
always  the  social  test.  Where,  however,  the  reason  of  the  rule 
fails,  the  rule  itself  must  fail.  That  is,  where  in  certain  cases 
the  results  of  private  property  are  clearly  opposed  to  the 
social  interests,  society  is  justified  in  restricting  the  extent  of 
the  property  right.  Thus  the  private  ownership  of  patents 
and  copyrights  is  everywhere  granted  only  for  a  term  of  years, 
the  right  of  the  owner  thereafter  lapsing  in  favor  of  society  at 
large.  Again,  while  property  in  land  is  in  general  beneficial, 
immense  private  holdings  may  sometimes  check,  rather  than 
further,  social  progress;  and  may  lead  to  well-considered 
movements  either  to  restrict  their  size,  as  in  New  Zealand,  or 
to  alter  the  form  of  the  property  right,  as  in  the  recent  Irish 
legislation  intended  to  convert  the  tenant  into  a  peasant 
proprietor. 

Interference  with  the  existing  rights  of  private  property 
must  always  depend  upon  a  convincing  and  irrefragable  evi- 
dence of  its  necessity.  For  in  the  main  private  property  and 
individual  liberty  have  been  the  correlative  products  of  human 
civilization.  The  limits  of  economic  freedom  and  economic 
competition  which  we  shall  discuss  in  the  following  chapters 
will  throw  light  upon  the  bounds  of  private  property.  We 
shall  see  that  the  maintenance  of  property  rights  depends  on 
the  existence  and  the  beneficence  of  competition.  Where 


136  Private  Property.  [§58 

competition  has  given  way  to  monopoly,  the  automatic  control 
of  property  rights  must  be  replaced  by  a  more  positive  social 
control.  Again,  when  the  condition  of  equality,  which  under- 
lies the  theory  of  competition,  is  absent,  competition  may 
lose  its  beneficent  force  and  the  economic  interests  of  society 
may  demand  the  fixing  of  a  limit  to  the  exercise  of  private 
property  rights.  Certain  idealists  would  go  much  further  and 
advocate  communism  or  socialism.  The  communist  demands 
the  complete  abolition  of  all  private  property;  the  socialist 
asks  for  the  abolition  of  private  property  in  the  means  of 
production  while  retaining  it  in  articles  of  consumption.  Both 
are  so  extreme  that  in  their  well-meant  endeavor  to  rectify 
undoubted  abuses,  they  would  forego  the  chief  advantages  and 
concomitants  of  modern  civilization  itself. 

58.   Content  of  Property  Rights. 

Property  rights  may  be  classified  under  five  heads  :  the  right 
of  gift,  the  right  of  disposition  by  contract,  the  right  of  use, 
the  right  of  bequest,  the  right  of  unlimited  acquisition.  Of 
these  the  first  and  second  are  well-nigh  unquestioned.  A 
man  may  not  only  give  away  his  property  as  he  chooses,  but 
he  may  sell,  lease,  loan  or  pawn  it.  It  is  only  where  rem- 
nants of  the  old  feudal  law  of  real  estate  survive  that  we  find 
any  limitation  put  upon  such  rights.  The  third  right  is  some- 
what less  absolute.  As  against  the  doctrine  of  "  vested  rights  " 
of  private  property,  the  theory  of  "  eminent  domain  "  forms 
the  entering  wedge  of  social  control  which  is  being  continually 
pushed  further  in  by  the  principle  of  public  policy.  Again, 
man  may  commonly  use  his  property  as  he  likes.  But  he  may 
not  use  it  in  such  a  way  as  to  create  a  nuisance  to  his  neigh- 
bor. The  individual  right  is  subject  to  social  restrictions. 

It  is,  however,  around  the  fourth  and  fifth  heads  that  the 
chief  controversy  has  taken  place.  The  right  of  bequest  or 
inheritance  is  one  of  late  growth.  Long  after  private  property 
was  instituted  its  existence  lapsed  with  the  death  of  the 
original  owner  and  the  property  itself  reverted  to  the  social 


§  5 8]  Content.  137 

group.  Long  after  the  right  of  bequeathing  chattels  de- 
veloped, there  was  no  such  privilege  connected  with  real 
estate.  Wills  and  intestate  succession  are  everywhere  the  out- 
growth of  the  family,  —  the  immediate  kinship  which,  as  we 
know,  was  the  product  of  economic  forces.  To  insure  the 
perpetuation  of  the  property  beyond  the  life  of  the  testator 
became  one  of  the  most  potent  factors  in  the  desire  of  acquisi- 
tion and  in  the  economy  of  production.  Where  the  economic 
and  social  importance  of  the  family  is  great,  we  even  find  that 
the  right  of  bequest  becomes  a  duty,  with  the  correlative  right 
of  inheritance  on  the  part  of  the  surviving  members  of  the 
family.  Such,  for  instance,  is  the  portion  legitime  or  legal  right 
of  the  children  in  France  and  Germany,  or  the  dower  right  of 
the  widow  in  Anglo-Saxon  countries. 

With  the  weakening  of  the  family  sentiment  in  modern 
times  and  its  restriction  to  a  continually  smaller  group,  the 
movement  for  a  limitation  of  inheritance  has  begun  to  make 
some  headway.  The  great  development  of  modern  progressive 
inheritance  taxes  and  more  especially  of  collateral  inheritance 
taxes  is  an  illustration  of  this  tendency.  When  the  rate  of 
such  taxation  reaches  15%  as  in  the  United  States  a  few  years 
ago,  1 8%  as  in  England,  and  20%  or  even  25%  as  in  some  of 
the  states  of  Switzerland  and  Australasia,  we  are  on  the  high- 
road to  a  considerable  limitation  of  the  right  of  bequest. 
There  is  every  reason  to  believe,  however,  that  just  as  the 
kernel  of  the  intimate  family  will  continue  to  subsist,  the 
movement  will  be  arrested  at  that  point  where  it  might  imperil 
the  tendency  to  acquisition. 

On  the  other  hand,  the  right  of  unlimited  accumulation  of 
wealth  has  scarcely  been  affected.  Even  though  it  may  be 
conceded  that  the  heaping  up  of  enormous  fortunes  may 
seriously  strain  the  machinery  of  democratic  government,  there 
is  an  insuperable  difficulty  in  fixing  any  point  beyond  which 
the  further  accumulation  of  wealth  may  be  declared  economi- 
cally or  politically  dangerous.  We  refer  here  to  wealth  in 
general,  honestly  acquired.  Private  property  in  certain  things 


138  Private  ^Property.  [§  58 

indeed  is  considered  wrong,  irrespective  of  amount;  dis- 
honesty is  as  reprehensible  and  as  frequent  (or  as  infrequent) 
in  a  small  as  in  a  large  business.  Great  fortunes  in  general 
can  be  honestly  acquired  only  by  conferring  great  advantages 
on  society ;  he  who  serves  the  community  best  will  reap  the 
greatest  profits.  The  successful  and  upright  business  man 
retains  the  market  only  so  long  as  he  undersells  his  compet- 
itors, and  to  that  extent  benefits  the  consumers.  To  check 
profits  would  mean  to  check  enterprise  ;  to  check  enterprise 
would  mean  higher  prices  and  greater  sacrifice.  The  limitation 
of  wealth  as  such  is  impracticable  and  economically  perilous. 

No  one,  however,  would  gainsay  the  essential  reasonable- 
ness of  the  general  feeling  that  prodigious  inequalities  of 
fortune  are  in  the  long  run  a  menace  to  the  stability  of  demo- 
cratic virtues.  But  the  solution  of  the  problem  cannot  be 
found  by  opposing  private  property  as  such,  or  by  erecting 
a  barrier  to  the  accumulation  of  wealth.  It  is  futile  to  deny 
or  to  minimize  the  basic  importance  of  private  property  on 
which  the  entire  civilization  of  modern  times  is  built.  The 
economic  ideal  may  best  be  expressed  in  the  words  of  Aris- 
totle of  old,  —  that  property  should  be  private,  but  its  use 
common.  What  he  meant  was  to  inculcate  the  idea  of  the 
public  trusteeship  of  wealth,  of  the  principle  of  the  social 
responsibility  of  the  wealth-getter.  Economic  progress  is 
indeed  intimately  bound  up  with  the  institution  of  private 
property,  and  yet  society  is  asserting  a  claim  to  be  heard  in 
its  control  and  disposition.  We  are  beginning  to  realize  the 
duties  as  well  as  the  rights  of  wealth.  This  moral  obligation 
is  based  on  the  sound  economic  conception  of  social  utility 
as  at  once  the  justification  and  the  limitation  of  private 
property. 


CHAPTER  X. 
COMPETITION. 

59.  References. 

A.  T.  Hadley,  Freedom  and  Responsibility  (1903),  ch.  v;  R.  T.  Ely, 
Evolution  of  Industrial  Society  (1903),  part  2,  ch.  i;  J.  S.  Nicholson, 
Principles  of  Political  Economy  (1893),  bk.  ii,  ch.  v;  E.  Kelly,  Govern- 
ment, or  Human  Evolution,  I  (1898) ;  P.  Kropotkin,  Mutual  Aid  a  Factor 
of  Evolution  (1902);  W.  W.  Willoughby,  Social  Justice  (1900),  ch.  ix  ; 
C.  H.Cooley,  Personal  Competition  (Am.  Econ.  Assoc.,  Economic  Studies, 
IV,  1899);  A.  R.  Wallace,  Studies,  Scientific  and  Social  (2  vols.,  1900), 
chs.  xiv-xvii,  xxiii,  xxviii;  A.  Marshall,  Some  Aspects  of  Competition 
(Jour.  Stat.  Soc.,  LIII,  1890)  ;  Clark  and  Giddings,  The  Modern  Dis- 
tributive Process  (1888). 

60.  Nature  of  Competition. 

Competition  is  in  a  certain  sense  the  law  of  all  life.  Biology 
has  made  us  familiar  with  the  animal  struggle  for  existence 
and  has  disclosed  the  process  of  natural  selection,  as  resulting 
in  the  survival  of  the  fittest.  The  chief  form  of  this  conflict  is 
between  the  living  being  and  the  forces  of  nature,  the  struggle 
of  the  individual  to  accommodate  himself  to  the  environment, 
and  the  evolution  under  favorable  conditions  of  those  who 
survive  by  learning  so  to  accommodate  themselves.  When 
nature  is  niggardly  and  her  resources  do  not  suffice  for  all,  the 
struggle  with  nature  is  reinforced  by  a  contest  between  the 
various  groups  or  units  to  secure  their  share.  It  is  here  that 
competition  emerges,  —  not  a  struggle  against  nature,  but  a 
conflict  of  one  unit  with  another  in  order  to  enjoy  the  bounty 
of  nature. 

It  is  a  striking  fact  that  the  earliest  form  of  competition 
is  a  group  competition  rather  than  an  individual  competition. 

139 


140  Competition.  [§  60 

At  all  events,  without  going  back  to  the  beginnings  of  life,  it 
is  reasonably  certain  that  the  first  competition  found  among 
human  beings,  as  indeed  is  still  the  case  with  most  animals, 
is  the  competition  of  one  horde  or  pack  with  another  in  the 
endeavor  to  secure  the  means  of  subsistence.  Thus  from  the 
very  outset  the  principle  of  mutual  aid  emerges,  and  competi- 
tion between  the  groups  is  possible  only  because  of  co-opera- 
tion within  the  group.  These  early  forms  of  co-operation  are 
seen  in  the  American  frontier  life  when  the  neighbors  come 
in  to  the  "  log-rolling,"  the  "  raising  "  of  the  building,  the 
"husking  bee"  or  the  "sugaring  off"  of  the  maple  trees. 
With  the  development  and  differentiation  within  the  group,  the 
principle  of  natural  selection,  that  is,  of  competition,  makes 
itself  felt  as  between  the  members  of  the  group ;  but  the 
process  is  slow  because  the  welfare  of  the  individual  is  deemed 
to  be  subordinate  to  that  of  the  whole.  As  the  groups  become 
larger  and  more  powerful,  we  notice  continually  higher  forms 
of  mutual  aid,  but  we  find  at  the  same  time  more  play  given 
to  the  activity,  or,  in  other  words,  to  the  competition,  of  the 
individual.  Finally,  in  historic  times  the  competition  between 
nations  is  decided  not  only  by  the  character  of  the  state,  as 
the  most  developed  form  of  human  co-operation,  but  still  more 
by  the  results  of  the  competitive  struggle  within  the  nation  in 
developing  those  qualities  of  body  and  mind  on  which  politi- 
cal power  ultimately  rests.  Competition  in  one  form  or  an- 
other is  coterminous  with  life  itself. 

If  competition,  as  a  biological  conception,  is  thus  an  ex- 
planation, in  part  at  least,  of  progress,  it  becomes  of  even 
more  importance  when  applied  to  the  economic  domain. 
The  subject  matter  of  economics  is  human  relations  to  wealth. 
The  difference  between  man  and  animals  is  not  that  man 
economizes  wealth  (for  some  animals  do  the  same),  but  that 
he  produces  wealth.  Competition  therefore  in  human  eco- 
nomics is  not  simply  a  contest  to  divide  an  existing  sum,  but  a 
struggle  to  share  in  an  increasing  stock.  The  first  requisite 
of  securing  an  additional  share  is  to  produce  more.  In  this 


§  61]  Forms  of  Competition.  141 

struggle  to  dispose  of  the  increased  product  to  the  whole  body 
of  consumers,  the  victory  will  lie  with  those  that  can  create 
better  or  cheaper  products.  The  surest  method  of  capturing 
the  market  is  to  undersell  one's  competitor.  Thus  competi- 
tion, as  a  business  principle,  means  a  struggle  to  augment 
wealth  through  a  lowering  of  cost.  If  competition  in  biology 
leads  only  indirectly  to  progress,  competition  in  economics  is 
the  very  secret  of  progress.  Under  normal  conditions  com- 
petition is  indeed  the  life  of  trade.  The  individual  competitor 
may  incidentally  amass  a  fortune,  but  if  he  does  so  honestly 
(and  dishonesty  is  not  an  attribute  of  wealth,  but  of  individ- 
uals, whether  rich  or  poor),  it  can  only  be  by  conferring  upon 
the  community  still  greater  benefits.  He  conquers  who  does 
best  for  society. 

Competition  in  economic  life,  therefore,  is  a  potent  factor 
in  the  growth  of  capital.  Working  hand  in  hand  with  the  prin- 
ciple of  private  property,  it  is  the  chief  incentive  to  progress. 
Through  it  we  secure  the  extension  of  the  margin  of  utilization, 
the  accumulation  of  the  surplus  available  for  human  wants. 
Competition,  moreover,  is  the  great  safeguard  of  society. 
It  is  the  protection  of  the  consumer  against  the  high  price 
which  accompanies  exorbitant  profits ;  for  it  is  the  automatic 
force  which  reduces  the  gains  of  the  inefficient  and  makes 
profits  depend  on  low,  rather  than  on  high  price.  It  evokes 
in  individuals  the  fundamental  characteristics  of  energy,  thrift 
and  power ;  and  it  harmonizes  to  a  large  extent  the  interests  of 
the  individual  and  of  society,  by  making  the  success  of  one 
depend  primarily  on  what  he  can  accomplish  for  the  other. 

61.  Forms  of  Competition. 

The  chief  forms  of  competition  are  five  in  number,  — com- 
modity competition,  individual  competition,  market  competi- 
tion, class  competition  and  race  competition. 

(i)  By  commodity  competition  is  meant  the  competition 
due  to  the  existence  of  social  choices.  Every  individual  is 
continually  debating  with  himself  whether  to  purchase  one 


142  Competition.  [§  61 

commodity  in  preference  to  another.  Where  he  is  on  the 
margin  of  doubt  or  of  indifference  the  slightest  alteration  in 
the  price  will  cause  him  to  substitute  something  else.  The 
principle  involved  is  hence  called  the  principle  of  substitution. 
The  vendor  must  constantly  be  on  the  watch  lest  any  increase 
of  price  cause  the  disappearance  of  his  sales.  We  substitute, 
however,  not  only  one  thing  for  another,  but  also  one  agency 
of  production  for  another :  in  the  crucible  of  economic  wants 
everything  is  finally  tested  by  its  capacity  to  afford  the  greatest 
satisfaction.  Not  only  will  the  consumer  choose  now  this  and 
now  that  commodity,  but  the  employer  will  increase  now  his 
labor  force,  now  his  stock  of  machinery,  so  as  to  secure  the 
best  results.  The  least  change  in  the  rate  of  wages  or  of 
interest  may  lead  him  to  substitute  the  one  for  the  other. 
It  is  only  by  replacing  the  less  efficient  by  the  more  efficient 
factor  that  the  producer  is  able  to  induce  the  consumer  to 
select  one  commodity  in  preference  to  another.  Competition 
of  factors  of  production  is  thus  really  an  adjunct  to  commodity 
competition.  Competition  through  substitution  is  hence  im- 
portant in  that  it  fixes  a  maximum  limit  beyond  which  prices 
cannot  go.  Every  economic  factor,  like  every  economic  good, 
may  be  in  either  actual  or  potential  competition  with  another. 
The  existence  of  competition,  however,  implies  the  mobility  or 
free  interchange  of  the  factors  of  production  from  enterprise 
to  enterprise  and  from  commodity  to  commodity.  When  the 
fluidity  of  capital  and  the  transferability  of  labor  are  complete, 
the  competition  is  absolutely  free.  When  there  are  hin- 
drances to  this  mobility,  we  speak  of  economic  friction.  The 
substitution  of  one  commodity  for  another  may  be  hindered 
by  legal,  social  or  economic  causes.  Under  normal  condi- 
tions, however,  the  competition  is  real  and  effective. 

(2)  The  competition  of  individuals  with  each  other  de- 
notes a  rivalry,  not  between  the  producers  of  different  com- 
modities or  between  the  different  factors  of  production,  but 
between  the  producers  of  the  same  commodity  or  the  same 
factors  of  production.  Under  normal  conditions  competition 


§  61]  Forms  of  Competition.  143 

here  puts  every  one  on  his  mettle,  and  success  is  a  measure  of 
the  contribution  to  the  social  fund.  The  more  a  laborer  pro- 
duces, the  higher  his  wages  will  be ;  the  larger  the  output  of  a 
particular  cotton  mill  and  the  lower  the  cost  at  which  it  can 
market  its  goods,  the  greater  will  be  the  benefit  to  the  con- 
sumer as  well  as  the  advantage  to  the  particular  producer. 
Competition  between  individuals  is  in  its  results  a  struggle  to 
enhance  efficiency,  to  increase  faculty,  to  multiply  productive 
power,  to  augment  ingenuity,  in  short,  to  develop  economic  per- 
sonality. The  more  potent  the  personality,  the  greater  will  be 
the  command  over  the  powers  of  nature,  the  more  rapid  will 
be  the  development  of  the  wealth  which,  although  owned  by 
individuals,  yet  inevitably  ministers  to  the  welfare  of  society. 

(3)  By  market  competition  we  mean,  not  the  competition 
of  individuals  in  the   market,   but  the  competition  of  markets 
with  each  other.     Market  competition  includes,  indeed,  both 
commodity  competition  and  individual  competition  in  the  sense 
that  in  every  market  individuals  as  well  as  commodities  com- 
pete   with  each  other ;    but  it   is  something   over  and  above 
these.     Every  great  city  is  continually  striving  to  develop  as  a 
centre  of  distribution  and  exchange,  in  the  well-founded  hope 
that  the  wealth  thus  amassed  will  lead  to  productive  efficiency 
in  other  lines.     New  York  is  competing  with  Baltimore  for  the 
grain  trade ;  New  Orleans  with  Galveston  for  the  cotton  trade. 
Competition  between  markets  seeks  to  overcome  the  factor  of 
distance,  and  lies  at  the  root  of  the  problem  of  modern  methods 
of  transportation.     Here   again   market  competition  leads   to 
reduced    cost,   and    the    struggle   for    market    supremacy  can 
be  fought   to  a  successful  issue  only  through   more  effective 
service. 

(4)  Class  competition  is  the  result  of  the  differentiation  of 
modern  society  into  groups  of  producers.     We  have  not  only 
the  great  division  into  laborers  and  capitalists,  but  the  further 
separation  of  the  latter  into  the  owners  of  agricultural,  com- 
mercial    and    industrial    capital  —  that    is,    landowners,    mer- 
chants and  factory  owners  —  and  the  still  further  subdivision 


144  Competition.  [§  61 

of  each  class  into  minor  groups.  It  pleases  some  writers,  like 
the  socialists,  to  erect  this  principle  under  the  name  of  class 
conflict  into  the  fundamental  explanation  of  all  economic 
change,  and  to  regard  it  as  involving  not  only  the  expropria- 
tion of  the  victim,  but  the  ultimate  downfall  of  society  as  well. 
In  reality  class  competition,  while  as  inevitable  as  the  other 
forms  of  competition,  is  within  proper  bounds  just  as  beneficial. 
Under  a  system  of  free  competition  capital  will  flow  into  in- 
dustry in  preference  to  agriculture  only  when  industrial  pur- 
suits are  more  productive,  that  is,  when  the  community  as  a 
whole  sets  more  store  by  the  products  of  industry.  Whether 
the  moneyed  interest  or  the  landed  interest  is  more  prosperous 
depends  at  bottom  upon  their  success  in  making  converts 
among  the  consumers,  and  the  extent  of  conversion  depends 
on  what  they  can  offer  in  the  way  of  lower  prices  or  better 
products.  The  laborers  and  the  capitalists  again  represent 
competing  interests,  but  the  share  of  each  in  wages  and  profits 
depends  ultimately,  as  we  shall  see,  on  their  relative  contribu- 
tion to  the  common  product. 

(5)  Race  or  national  competition  in  its  economic  aspects  is 
the  final  form  of  the  modern  struggle.  The  most  marked 
characteristic  of  recent  progress  is  the  gradual  substitution  of 
peaceful  rivalry  of  commerce  for  the  sanguinary  clash  of  arms. 
The  modern  weapon  is  not  the  javelin  or  the  rifle,  but  the 
enterprise  of  the  domestic  producer  aided  by  the  exporter. 
Every  nation  that  has  reached  commercial  or  industrial  matu- 
rity endeavors  to  seek  in  the  foreign  market  a  profitable  outlet 
for  its  own  surplus  productions.  This  attempt  to  secure  a 
market  is  indeed  responsible  for  an  occasional  war.  In  the 
main,  however,  the  struggle  to-day  is  one  for  cheapness,  and 
in  the  end  it  is  not  the  large  army  or  navy  but  the  most  effi- 
cient producer  that  permanently  retains  the  neutral  market. 
It  is  not  to  be  denied  that  both  a  large  army  and  a  large  navy 
may  be  needed  to  protect  the  commercial  or  other  national 
interests ;  but  the  foundation  of  military  greatness  in  modern 
times  is  primarily  economic,  and  when  economic  efficiency 


§62]  Dangers  of  Competition.  145 

has  disappeared,  military  strength  must  also  disintegrate. 
Great  nations  are  now  judged,  not  by  the  numbers  of  their 
battalions  or  ships,  but  by  the  volume  of  domestic  production 
and  foreign  trade.  Economic  power  represents  potential  mili- 
tary capacity.  Here,  again,  national  competition  is  salutary. 
The  fundamental  error  of  the  old  mercantilistic  doctrine  was 
the  belief  that  what  one  nation  gains  in  trade,  the  other  neces- 
sarily loses.  The  modern  doctrine  is  that  every  nation  is 
helped  by  the  prosperity  of  its  neighbor,  on  the  principle  that 
the  more  wealthy  the  customer  the  greater  will  be  his  pur- 
chases. Both  nations  may  gain,  although  one  may  gain  more 
than  the  other.  The  foreign  markets  can  be  retained  only  by 
underselling ;  the  profits  of  one  country  can  be  secured  only 
by  conferring  these  advantages  on  the  consumers  of  the  others. 
National  competition,  Tike  personal  and  class  competition,  can 
benefit  the  individual  country  only  by  benefiting  the  group ; 
it  enriches  one  nation,  but  incidentally  develops  the  others. 

62.  Dangers  of  Competition. 

In  describing  the  essential  beneficence  of  competition  in  its 
various  forms,  we  must  not  blind  ourselves  to  its  shortcomings. 
Some  of  these  evils  are  inevitable.  Where  there  are  a  contest 
and  a  victor,  there  must  be  a  victim.  There  can  be  no 
struggle  without  some  pang  to  the  conquered.  Suffering  is  an 
accompaniment  of  progress,  just  as  sacrifice,  at  least  in  the 
sense  of  effort,  is  a  prerequisite  to  enjoyment.  In  the  animal 
world,  where  the  sway  of  competition  is  relentless,  the  evil  is 
pronounced.  Progress  there  is  purchased  by  the  death  of  the 
victim.  The  fight  is  one  of  bestial  instincts  and  brute  powers, 
—  the  victory,  however  beneficial  to  the  race,  is  secured  at  a 
tremendous  sacrifice.  Human  competition,  on  the  other  hand, 
has  in  its  economic  form,  as  we  have  seen,  something  in 
common  with,  but  also  much  in  contradistinction  to,  brute 
competition.  Economic  competition  may  indeed  involve  the 
economic  death  of  the  unsuccessful  competitor.  The  producer 
who  is  undersold  by  his  rival  will  ultimately  be  compelled 

10 


146  Competition.  [§  62 

to  abandon  the  field.  His  adversary's  success,  which  means 
progress  for  the  consumer,  spells  hie  ruin. 

There  are,  however,  two  points  in  which  brute  and  human 
competition  are  unlike.  In  the  first  place  the  economic  de- 
feat may  be  only  temporary.  The  producer  who  has  failed 
in  one  business,  often  succeeds  in  another  for  which  he  is 
better  fitted.  His  original  failure  may  be  the  means  of  re- 
doubled efforts  and  final  victory  elsewhere.  His  downfall  is 
not  necessarily  his  end,  but  may  be  his  real  beginning.  In 
the  second  place,  in  economic  competition  there  may  be  no 
death  at  all,  but  only  a  relative  defeat  in  the  sense  that  the 
progress  of  both  competitors  is  unequal.  Laborers  compete 
with  capitalists,  one  country  vies  with  another ;  both  may  con- 
tinually gain,  even  though  in  different  proportions.  In  brute 
competition  the  struggle  is  only  for  consumption ;  in  human 
competition  the  contest  takes  the  form  of  production.  In  the 
end,  indeed,  the  goal  of  both  is  enjoyment;  but  the  means 
of  reaching  the  end  are  different.  This  difference  renders 
possible  a  participation  by  both  contestants  in  the  gains  of 
production  that  are  caused  by  economic  competition. 

Even  with  these  qualifications,  however,  competition  is  often 
a  painful  process,  none  the  less  painful  because  the  struggle 
has  been  transferred  from  the  arena  of  bodily  strength  to  that 
of  mental  capacity.  The  competition,  moreover,  may  some- 
times become  so  fierce  that  for  a  time  at  least  it  exhausts  the 
powers  of  both  competitors.  This  is  the  "  cut-throat  competi- 
tion "  of  which  we  have  heard  so  much  in  recent  years,  when, 
in  the  effort  to  capture  the  market,  prices  are  reduced  below 
the  cost  of  production.  The  temporary  advantages  to  the 
consumer  are  dearly  purchased  through  the  ruin  of  all  the  pro- 
ducers. Here  we  see  competition  at  its  worst,  because  all 
competitors  are  pulled  down  to  the  level  of  the  most  unscrupu- 
lous. In  the  same  way  there  may  be  excessive  competition 
between  laborers,  as  when  the  necessities  of  the  laborers  com- 
pel them  to  accept  the  standard  of  the  worst-paid  or  hardest- 
worked  laborer.  In  the  one  case  as  in  the  other  this  unfair 


§  63]  Limits  of  Competition.  147 

competition  endangers  the  perpetuity  of  a  successful  business 
or  of  a  prosperous  working  class.  The  question  then  arises  as 
to  whether  it  is  not  possible  to  conserve  the  chief  advantages 
of  competition  and  at  the  same  time  to  lop  off  some  of  its 
excrescences ;  to  maintain  the  social  benefits  while  minimizing 
the  individual  costs.  In  other  words  the  question  is :  what 
are  the  real  limits  of  competition? 

63.  Limits  of  Competition. 

The  problem  may  be  approached  from  three  points  of  view, 
—  the  level  of  competition,  the  maintenance  of  equality  and 
the  existence  of  quasi-public  enterprises. 

( i )  The  fundamental  distinction  between  brute  and  human 
competition,  underlying  all  the  others  that  have  been  men- 
tioned, is  the  point  with  which  we  have  become  familiar, 
namely,  that  while  animals  are  governed  by  their  environment, 
man,  to  a  certain  extent  at  least,  can  alter  his  environment. 
This  is  true  not  alone  of  the  physical,  but  to  a  much  greater 
extent  of  the  socio-economic  environment.  The  function  of 
society  is  to  raise  the  general  plane  of  competition.  Even  in 
that  extreme  form  of  competition  known  as  war,  international 
agreements  have  succeeded  in  preventing  a  certain  amount  at 
least  of  wanton  injury  and  needless  suffering,  without  in  any 
degree  impairing  the  real  intensity  of  the  conflict.  It  is  no 
longer  true  that  "all  is  fair  in  love  and  war."  In  economic 
life,  similarly,  we  often  hear  of  unfair  or  cut-throat  competition, 
with  the  implication  that  unworthy  and  reprehensible  measures 
are  being  employed.  With  the  development  of  business  life 
there  has  been  a  continual  movement  away  from  the  early 
brute-like  struggle.  The  community  to-day  is  frequently  con- 
trasting "  fair  "  with  "  unfair"  competition.  Not  only  does  the 
idea  of  what  constitutes  a  "  fair  "  competition  change  from  age 
to  age,  but  it  differs  at  the  same  age  in  different  occupations. 
The  practices  of  our  railways  are  very  different  from  what  they 
were  a  generation  ago.  The  professional  ethics  governing  the 
competitive  charges  of  a  lawyer  or  a  physician  scarcely  resemble 


148  Competition.  [§  63 

those  of  a  tradesman.  The  code  of  business  morals  is  not 
the  same  in  Wall  Street  as  in  Worth  Street ;  the  competition 
of  farmers  is  often  conducted  on  a  different  level  from  that 
of  factory  owners.  Each  group  has  its  own  standard,  and  the 
average  man  is  satisfied  if  he  conforms  to  it.  The  object  of 
all  progress  is  to  elevate  this  standard  and  to  give  a  continu- 
ally broader  interpretation  of  what  is  economically  "  fair." 
Conformity  to  the  standard,  however,  involves  some  interfer- 
ence with  individual  liberty.  Through  the  force  of  public 
opinion,  reflected  in  business  usage  or  legislative  enactment, 
competition  is  being  made  to  assume  a  higher  form.  Dishon- 
esty is  frowned  down,  factory  laws  are  enacted,  the  scab  and 
strike-breaker  are  reprobated,  unscrupulous  financiering  is  pun- 
ished. Competition  is  not  destroyed,  but  its  level  is  raised. 

(2)  The  second  consideration  is  that  of  equality.  Perfect 
equality  indeed  does  not  exist,  since  variety  is  the  law  of  life. 
Competition  does  its  work,  in  the  economic  as  in  every  other 
field,  precisely  by  giving  the  victory  to  the  better  equipped. 
When  the  disparity  between  the  competitors,  however,  is  enor- 
mous, the  community  often  fails  to  reap  the  essential  benefits  of 
competition.  If  one  individual  can  produce  a  commodity  for 
ten  cents,  and  if  it  costs  his  sole  competitor  fifty  cents,  a  sell- 
ing price  of  forty-five  cents  will  give  him  the  command  of  the 
market ;  whereas  with  a  more  capable  group  of  competitors  he 
might  be  compelled  to  reduce  the  price  to  fifteen  cents.  The 
greater  the  equality  between  the  competitors,  the  more  sub- 
stantial are  the  gains  to  the  consumers.  If  the  producer  can 
in  some  way  be  rendered  more  efficient,  so  that  the  disparity 
will  diminish,  to  that  extent  the  community  will  gain.  This 
is  also,  as  we  shall  see,  the  principal  argument  in  favor  of  the 
regulation  of  international  competition  through  a  protective 
tariff.  In  the  same  way  the  demand  for  a  minimum  wage 
and  some  of  the  other  legitimate  practices  of  trades  unions 
are  intended  to  bring  the  weakest  nearer  the  standard  of  the 
strongest.  In  its  best  aspects  it  is  a  levelling  up,  rather  than 
a  levelling  down. 


§  63]  Limits  of  Competition.  149 

The  point  to  be  emphasized  is  that  the  strengthening  of  a 
weak  competitor  may  redound  to  the  advantage  not  only  of 
the  competitor  himself,  but  to  that  of  the  whole  group,  and 
ultimately  to  that  of  the  community.  Competition  remains, 
but  is  rendered  less  unequal.  Here,  as  elsewhere,  indeed, 
there  is  always  the  danger  that  the  community  may  suffer 
more  from  the  restriction  on  the  strong  than  it  gains  from  the 
advantage  to  the  weak.  This,  however,  is  the  danger  of  all 
democracy,  which  must  be  guarded  against  in  other  ways. 

(3)  The  third  point  is  the  existence  of  quasi-public  enter- 
prises. Shortly  after  the  so-called  "  merger  decision  "  of  the 
Supreme  Court  in  1904,  in  which  the  Northern  Securities 
Company  was  declared  illegal,  a  noted  lawyer  stated  publicly 
by  way  of  criticism  that  no  one  any  longer  believed  in  the  old 
adage  that  "  competition  is  the  life  of  trade."  This  remark 
rested  upon  a  confusion  of  thought.  Competition  of  a  certain 
kind  between  railways  is  certainly  not  the  life  of  trade.  But 
why?  Railways,  like  some  other  media  of  transportation  and 
transmission  of  commodities,  intelligence  and  power,  differ 
from  ordinary  commercial  enterprises  in  that  they  are  quasi- 
public  in  nature.  They  carry  on  enterprises  in  which  the 
public  interest  is  so  commanding  that  it  must  not  be  subordi- 
nated to  private  profit.  In  ordinary  private  business  buyers 
and  sellers  make  their  individual  bargains  with  each  other ; 
and  while,  as  we  shall  see,  open  competitive  prices  tend  to 
uniformity,  there  is  nothing  to  prevent  the  more  powerful  or 
the  more  favored  purchaser  from  secretly  securing  a  lower 
price.  Much  of  the  profit  of  the  business  man,  indeed,  con- 
sists in  this  skill  in  purchasing  on  favorable  terms ;  the  very 
essence  of  usual  business  practice  is  this  system  of  different 
prices  to  different  customers.  It  is  precisely  the  attempt  on 
the  part  of  railways  to  pursue  this  same  policy  which  has  cre- 
ated the  "railway  problem"  in  the  United  States.  It  is  now 
recognized  that  the  railway  has  no  more  right  to  make  per- 
sonal discriminations  between  its  customers  than  has  the 
government  post-office.  The  wealthy  merchant  cannot  buy 


150  Competition.  [§64 

postage  stamps  cheaper  than  his  smallest  competitor;  he 
ought  not  to  be  able  to  secure  more  favorable  freight  facili- 
ties. Competition  in  ordinary  business  means  the  different 
treatment  of  individuals,  and  is  beneficial ;  competition  in 
railway  rates  means  discrimination  between  shippers,  and  is 
reprehensible.  Competition  in  ordinary  prices  is  the  soul  of 
trade ;  competition  in  railway  rates  is  the  death  of  legitimate 
trade.  The  only  kind  of  competition  that  is  desirable  in 
quasi-public  enterprises  is  the  competition  of  service  and  of 
facilities. 

Competition  therefore  is  a  force  that  must  not  be  abused. 
It  is  applicable  only  in  a  slight  degree  to  certain  kinds  of 
business,  it  works  most  beneficially  in  the  presence  of  com- 
parative equality,  and  its  level  of  action  stands  in  need  of 
a  continual  elevation.  Within  these  limits,  and  with  these 
conditions,  it  is  a  vital  and  salutary  force. 

64.   Substitutes  for  Competition. 

As  opposed  to  competition  there  are  three  possible  regula- 
tors of  economic  phenomena,  —  custom,  co-operation  and 
monopoly. 

(i)  Custom  at  one  time  played  a  far  greater  role  than 
it  does  to-day.  In  the  more  immobile  communities  of  the 
Orient,  as  well  as  in  the  early  middle  ages  of  Europe,  society 
was  largely  governed  by  status  rather  than  by  contract. 
People  were  born  into  certain  conditions  and  occupations, 
and  to  emerge  from  these  was  difficult  or  impossible.  In 
the  rigidity  of  the  Indian  caste  system  we  see  the  highest 
development  of  custom.  Prices  also  were  largely  customary 
prices ;  the  entire  mediaeval  conception  of  justum  pretium 
centred  in  the  attempt  to  enforce  the  customary  price.  Cap- 
ital was  to  a  great  extent  fixed  in  land,  and  thus  immo- 
bile ;  labor  was  not  permitted  to  shift  at  will  from  place  to 
place  or  from  trade  to  trade.  Nevertheless,  even  in  the  stage 
of  the  customary  economy  competition  was  not  entirely  ab- 
sent. At  bottom  values  were  far  more  dependent  upon  the 


§  64]          Substitutes  for  Competition.  151 

working  out  of  subtle  and  masked  competitive  forces  than 
is  usually  conceded.  To-day  custom  still  plays  a  perceptible 
although  fast- dwindling  role  in  the  determination  of  some 
economic  phenomena.  Even  in  the  backward  and  primitive 
sections  of  our  country  the  storm  and  stress  of  modern  com- 
petitive life  are  making  rapid  inroads.  The  economic  theory 
of  industrial  society  now  rests  on  competition,  not  on  custom. 

(2)  Co-operation  is  in  some  aspects  the  opposite,  but  in 
others  the  corollary,  of  competition.  We  have  seen  that  from 
the  very  beginning  there  was  mutual  aid  within  the  group,  in 
order  the  better  to  carry  on  the  competition  between  the 
groups.  There  is  even  to-day  no  competition  within  the  fam- 
ily, although  a  very  lively  competition  between  families.  So  in 
the  same  way  the  stockholders  of  a  corporation  co-operate,  in 
order  the  more  effectively  to  compete  with  another  corpora- 
tion. There  are  in  fact  all  kinds  of  associations,  voluntary 
and  compulsory,  including  church  and  state,  which  fill  out 
modern  social  life  and  which  have  more  or  less  economic 
influence,  working  in  perfect  harmony  with  the  struggles  of 
the  market.  This  kind  of  co-operation  is  compatible  with 
competition. 

Co-operation  in  its  technical  sense,  however,  means  the 
abandonment  of  competition  in  distribution  and  in  production. 
In  distributive  co-operation,  the  customers  who  are  members 
of  the  co-operative  societies  select  one  of  themselves  as  man- 
ager of  the  store  and  share  any  resulting  profits.  As  they  are 
expected  to  make  no  purchases  elsewhere,  there  is  no  compe- 
tition. Such  co-operative  stores  are  found  principally  in  Great 
Britain.  They  have  never  flourished  in  America  because  they 
have  been  unable  to  supply  the  commodities  as  cheaply  as  the 
great  department  stores.  In  productive  co-operation  the  ob- 
ject is  to  eliminate  the  capitalist  and  to  remove  competition 
between  the  workmen.  The  laborers  elect  one  or  more  of 
their  number  to  control  the  enterprise,  and  divide  among 
themselves  the  gains.  Co-operative  production  has  achieved 
some  notable  triumphs  in  both  Europe  and  America,  but  as 


152  Competition.  [§64 

we  shall  see  (§  184),  its  scope  is  exceedingly  restricted,  and 
there  are  great  obstacles  to  its  general  adoption  as  a  substitute 
for  competition. 

(3)  While  co-operation  implies  an  abandonment  of  compe- 
tition either  between  consumers  or  between  laborers,  there  is  a 
third  form  of  co-operation  which  implies  abandonment  of  com- 
petition among  capitalists  or  managers  of  business.  This  is 
usually  called  combination.  If  the  combination  is  incomplete, 
however,  it  is  still  subject  to  the  force  of  competition;  if 
it  is  complete,  it  has  become  a  monopoly.  Monopoly  there- 
fore is  the  ultimate  outcome  of  the  cessation  of  business 
competition. 

Monopoly  has  existed  in  many  forms,  and  there  are  accord- 
ingly several  categories  of  classification.  Monopolies  are  either 
private  or  public,  and  public  monopolies  are  either  fiscal  or 
social.  Fiscal  monopolies  are  enterprises  conducted  by  gov- 
ernment for  fiscal  reasons,  like  the  salt  or  tobacco  monopoly 
abroad.  Social  monopolies  are  enterprises  conducted  by 
government  primarily  for  social  reasons,  like  the  federal 
post-office,  or  the  South  Carolina  dispensary  system.  Private 
monopolies,  on  the  other  hand,  are  of  three  classes,  —  personal, 
labor  and  capital  monopolies.  Personal  monopolies  rest  upon 
natural  talent ;  a  great  actor  or  musician  is  in  a  class  by  him- 
self. Labor  monopolies  rest  upon  labor  organization  and 
affect  chiefly  the  employer,  although  indirectly  the  public. 
Capital  monopolies  are  the  ones  with  which  the  consumer  in 
general  usually  comes  into  contact. 

Capital  monopolies,  finally,  are  of  four  kinds, —  legal,  natural, 
franchise  and  ordinary  business  monopolies,  (i)  Legal  mo- 
nopolies were  at  one  time  common,  through  grant  of  the 
monarch  to  favorites.  They  are  to-day  found  only  in  the 
restricted  form  of  patents  and  copyrights.  (2)  Natural  mo- 
nopolies are  those  which  depend  on  natural  location,  as  in 
the  case  of  certain  specially  favored  lands,  mines  or  waters. 
(3)  Franchise  monopolies  take  the  form  of  quasi-public  en- 
terprises like  railways,  telegraph  and  telephone  companies, 


§  64]          Substitutes  for  Competition.  153 

gas,  water  and  electric  light  companies,  whose  profitable  oper- 
ation depends  on  the  grant  of  a  franchise  to  use  the  public 
highways,  on,  above  or  below  the  surface.  Strictly  speaking, 
they  might  be  classed  as  a  subdivision  of  natural  monopolies. 
Here  experience  shows  that  competition  is  in  the  long  run 
impossible  and  undesirable,  either  because,  as  in  the  case  of 
railways,  it  leads  to  discrimination,  or  because,  as  in  the  case 
of  the  so-called  municipal  monopolies,  it  leads  to  an  unen- 
durable interference  with  the  streets  or  an  unnecessary  dupli- 
cation of  plant.  (4)  Ordinary  business  monopolies,  finally, 
cover  the  great  mass  of  modern  enterprises  known  as  trusts, 
and  as  to  the  essential  monopolistic  character  of  which  there 
is  room  for  doubt,  as  will  be  explained  later  (§  149). 

It  is  clear  that  private  monopoly  is  a  satisfactory  regulator 
of  price  only  in  personal  monopolies,  where  the  consumer  is 
glad  to  recognize  and  to  foster  exceptional  talent,  as  well  as  in 
patents  and  copyrights  where  society  is  willing  for  a  time  to 
forego  the  advantage  of  competition  for  the  sake  of  stimu- 
lating invention,  and  thus  ultimately  reaping  the  benefits.  In 
all  other  cases  of  private  monopoly,  the  consumer  is  to  a  cer- 
tain extent  at  least  left  defenceless.  Where  there  is  no  reliance 
upon  competition,  recourse  must  be  had  to  some  form  of  legis- 
lative control.  Unregulated  monopoly  can  therefore  only  in 
most  exceptional  cases  be  a  substitute  for  competition. 

Competition  hence  remains  the  permanent  and  controlling 
force  of  economic  society.  It  is  not  all  pervasive  or  uniformly 
advantageous.  But  in  its  fundamental  aspect  it  lies  at  the  root 
of  progress,  and  when  stripped  of  its  excrescences  and  applied 
under  proper  limitations  it  is  as  beneficent  as  it  is  widespread. 
In  the  complex  society  of  the  present  day,  however,  the  limi- 
tations on  the  principle  often  assume  almost  as  much  impor- 
tance as  the  principle  itself. 


CHAPTER   XI. 
FREEDOM. 

65.  References. 

H.  J.  Nieboer,  Slavery  as  an  Industrial  System  (1900) ;  J.  K.  Ingram, 
History  of  Slavery  and  Serfdom  (1895)  >  J-  E.  Cairnes,  The  Slave  Power 
(1862)  ;  T.  H.  Green,  Liberal  Legislation  and  freedom  of  Contract  in 
Works  (Nettleship's  ed.,  1888),  III ;  J.  F.  Stephens,  Liberty,  Equality 
and  Fraternity  (1873)  ;  H.  C.  Adams,  Economics  and  Jurisprudence  (Am. 
Econ.  Assoc.,  Economic  Studies,  II,  1897)  ;  A.  B.  Hart,  Slavery  and  Aboli- 
tion (Am.  Nation,  XVII),  Actual  Government  (Am.  Citizen  Series),  §  196; 
A.  T.  Hadley,  Freedom  (1903),  chs.  iii,  iv,  vi;  R.  T.  Ely,  Studies  in  Evo- 
lution of  Industrial  Society  (1903),  part  2;  E.  Kelly,  Gowrnment  (1901), 
II,  bk.  i,  ch.  v;  J.  S.  Nicholson,  Principles,  bk.  v,  chs.  ii,  iii,  and  Strikes 
and  Social  Problems  (1896),  chs.  iv,  vii ;  J.  S.  Mill,  Principles  (1880),  bk.  v, 
ch.  x;  S.  and  B.  Webb,  Industrial  Democracy  (1904),  part  3,  ch.  iv,  and 
Problems  of  Modern  Industry  (1898),  ch.  x  ;  D.  G.  Ritchie,  The  Principles 
of  State  Interference  (1896)  ;  H.  Rashdall,  The  Rights  of  the  Individual 
(Econ.  Rev.,  VI,  1896)  ;  G.  G.  Groat,  Trade  Unions  and  the  Law  in  New 
York  (Columbia  University  Studies,  1905),  ch.  xi ;  Peace  with  Liberty  and 
Justice  (Addresses  at  the  meeting  of  the  National  Civic  Federation, 
T9°5) ;  J-  R-  Commons,  Immigration  and  its  Economic  Effects  (Indust. 
Commiss.  Report,  XV,  1902) ;  Turner,  Chinese  and  Japanese  Labor  in  the 
Mountain  and  Pacific  Coast 'States  (ibid.)  ;  Report  and  Recommendations 
on  Immigration,  ibid.,  XIX,  1902,  957-1030;  various  articles  on  Immi- 
gration in  American  Academy  of  Social  and  Political  Science,  Annals, 
XXIV  (1904),  151-239;  Conference  of  the  National  Civic  Federation  on 
Immigration,  1905. 

66.   Origin  and  Growth  of  Slavery. 

Industrial  liberty,  like  private  property,  is  the  result  of  a  slow 
evolution.  The  ordinary  picture  of  the  freedom  of  the  un- 
tutored savage  is  as  fanciful  as  the  rest  of  the  fairy  tales  of  our 
youth.  Primitive  man  lacked  freedom  in  three  ways  :  he  was 
in  abject  dread  of  nature,  of  his  stronger  comrades,  and  of  the 


§66]  Growth  of  Slavery.  155 

social  group.     In  his  ignorance  of  natural  phenomena  he  was 
a  prey  to  all  kinds  of  fear  and  superstition  and  an  easy  victim 
of  the  sorcerer  or  medicine  man.     Living  in  a  society  based  on 
brute  strength,  he  was  at  the  mercy  of  the  more  stalwart  savage.  , 
Dependent,  as  we  have  seen,  on  the  horde  or  clan  for  existence,  : 
he  was  hemmed  in  by  social  customs  that  could  not  be  in- 
fringed and  by  group  prohibitions  which  it  would  be  folly  to  - 
evade.     Civilization,  and  not  primitive  nature,  is  the  creator  of 
liberty.     Knowledge  has  emancipated  man  from  superstition, 
law  and  order  have  protected  him  from  the  oppressor,  social 
progress  has  evolved  in  every  phase  of  life  a  sphere  of  liberty, 
ever   more    secure    from    the    encroachments    of    absolutism. 
Economic  liberty  like  political  liberty,  freedom  of  thought  like 
freedom   of  speech,  are   the   product   of  the  most  advanced 
stages  of  society. 

The  freedom  which  is  of  special  concern  to  the  economist  is 
of  two  kinds:  bodily  freedom  as  the  basis  of  all  labor,  and 
freedom  of  economic  action  apart  from  control  of  one's  own 
labor.  The  first  involves  personal  liberty  in  the  narrower 
sense  and  leads  to  a  study  of  slavery.  The  second  comprises 
a  number  of  phenomena  to  be  discussed  in  §  69.  We  take  up 
first  the  subject  of  slavery. 

The  origin  of  slavery  has  until  recently  been  much  mis- 
understood. It  is  commonly  stated  that  there  are  four  causes 
of  slavery :  conquest,  debt,  crime  and  birth.  Slaves,  we  are 
told,  were  recruited  from  the  victims  of  war ;  from  the  ranks 
of  those  that  voluntarily  sold  themselves  or  were  unable  to  dis- 
charge their  debts ;  from  the  criminals  who  earned  a  punish- 
ment only  short  of  death ;  and  from  the  offspring  of  existing 
bondmen.  This  statement  is  accurate  enough,  but  it  sheds  no 
light  on  the  real  problem  of  the  origin,  the  spread  and  the 
decline  of  slavery. 

Slavery  is  obviously  an  institution  designed  to  secure  the 
services  of  others  by  force.  It  presupposes  the  need  of  labor 
on  a  moderately  large  scale.  In  the  earliest  stages  of  society 
well-nigh  the  only  work  done  by  man  consists  of  hunting  and 


r  56  Freedom.  [§  66 

fishing,  each  in  itself  to  a  great  extent  a  pleasurable  activity. 
Every  member  of  the  community  concerns  himself  with  such 
work,  and  there  is  neither  need  nor  room  for  compulsory  labor. 
It  is  only  when  private  property  develops  that  we  find  the 
beginnings  of  slavery.  In  exceptional  cases  we  can  trace  pri- 
vate property  and  intertribal  barter  among  fishing  groups,  as 
in  some  of  the  Indian  tribes  on  the  North  Pacific  coast.  Here 
the  slave  is  utilized  to  a  certain  extent  in  work  connected  with 
fishing  and  in  domestic  labor.  In  general,  it  may  be  said  that 
slavery  can  exist  in  the  primitive  economic  stage  only  when 
subsistence  is  easy  to  procure  without  the  aid  of  capital. 
When  this  condition  is  lacking,  as  among  the  Australians  as 
well  as  among  the  great  mass  (although  not  all)  of  the  Ameri- 
can Indians  and  the  Eskimos,  slavery  is  unknown. 

As  we  have  seen,  however,  private  property  acquires  social 
importance  only  with  the  pastoral  stage.  The  slave  can  now 
be  employed  as  the  cowherd,  the  swineherd,  the  shepherd. 
The  patriarchal  family  develops,  and  the  slave  becomes  an  in- 
tegral part  of  the  family  group.  Slavery,  however,  is  still  rela- 
tively insignificant.  Even  large  flocks  and  herds  can  be  tended 
by  a  few  herdsmen,  and  the  existence  of  a  great  mass  of 
poverty-stricken  freemen  renders  recourse  to  slaves  unneces- 
sary. The  accumulation  of  large  numbers  of  domestic  slaves, 
moreover,  is  prevented  by  the  exigencies  of  a  roving  existence. 

When  we  come  to  the  agricultural  stage,  the  conditions 
change.  Cultivation  of  the  soil  is  arduous,  and  yet  with  an 
adequate  force  of  laborers  it  is  profitable.  On  a  given  plot  of 
land  every  additional  laborer  means  up  to  a  certain  point  an 
increased  yield;  the  existence  of  settled  habitations  renders 
possible  the  employment  of  domestic  servants  in  various 
capacities.  The  more  slaves,  the  more  wealth  and  ease  for 
the  slave  owner. 

In  the  early  stage  of  the  agricultural  period  slavery  is  still 
relatively  inconspicuous.  After  the  immediate  needs  of  the 
master  and  his  family  have  been  met  there  is  little  use  for 
additional  laborers.  It  is  only  with  the  growth  of  barter  and 


§  66]  Growth  of  Slavery.  1 57 

the  increasing  possibility  of  surplus  products  that  it  becomes 
profitable  to  augment  both  one's  land  and  one's  slaves.  In 
other  words,  a  market  for  agricultural  production  must  develop, 
and  the  landed  estates  must  be  managed  as  business  enter- 
prises. Slavery  becomes  highly  lucrative,  and  on  the  great 
estates  there  is  now  such  a  diversified  activity  that  large 
numbers  of  slaves  are  employed  not  only  as  domestics  but  in 
all  kinds  of  industrial  work.  Thus  in  Rome  the  development 
of  slavery  on  an  extended  scale  did  not  take  place  until  the 
later  centuries  of  the  republic,  when  slavery  on  the  latifundia 
became  the  dominant  form  of  great  business  enterprise.  In 
the  same  way  slavery  became  an  important  factor  in  America 
only  when  the  cultivation  of  tobacco  and  later  of  cotton  on  a 
considerable  scale  for  the  foreign  market  made  the  labor  of  slave 
gangs  profitable. 

It  will  be  observed,  however,  that  in  addition  to  the  exist- 
ence of  a  market  one  other  factor  is  necessary  to  the  spread  of 
slavery.  This  is  a  supply  of  free  land.  It  is  only  when  there 
are  large  tracts  of  virgin  and  unoccupied  soil  that  slavery  be- 
comes at  once  lucrative  and,  from  the  point  of  view  of  the 
landowner,  necessary.  It  is  obvious  that  if  any  one  can  occupy 
and  till  on  his  own  account  a  plot  of  land  he  will  not  vol- 
untarily work  for  others,  except  for  a  remuneration  so  large 
that  it  will  exceed  what  he  himself  can  raise  from  the  soil. 
The  landowner  who  cannot  secure  voluntary  assistance  ex- 
cept on  what  he  regards  as  ruinous  terms  resorts  to  forced 
labor.  As  long  as  there  is  a  boundless  expanse  of  good  land 
available,  slave  labor,  which  implies  a  superficial  cultivation,  is 
still  economical.  It  pays  better  to  bring  fresh  land  under  the 
plough  than  to  put  more  effort  into  old  land ;  it  is  more  profit- 
able to  increase  acreage  than  to  redouble  effort.  Even  when 
the  land  becomes  poorer  through  an  exhaustive  culture,  slavery 
is  still  profitable  in  the  older  sections,  not  so  much  for  the 
raising  of  produce  as  for  the  raising  of  slaves  to  be  sold  to  the 
newer  and  more  distant  lands.  To  the  landowner  it  is  imma- 
terial whether  he  secures  his  wealth  from  the  produce  of  land 


158  Freedom.  [§  67 

or  of  slaves  :  as  long  as  the  supply  of  fresh  land  maintains  the 
•value  of  slaves,  their  increasing  numbers  will  counterbalance 
the  decreasing  fertility  of  his  land.  •  Finally,  when  slavery  has 
become  the  dominant  factor  in  production,  it  is  profitably 
employed  not  only  in  agriculture,  but  also  in  industry. 

Thus  in  classic  Greece  slavery  developed  with  the  growth  of 
intermunicipal  markets,  and  grew  strong  with  the  expansion  of 
the  colonies  on  all  sides  of  the  Mediterranean.  The  great 
city-states  became  not  only  the  chief  marts  but  also  the  chief 
breeders  of  slaves,  and  slavery  finally  dominated  industry  as 
well.  With  the  advent  of  Roman  sovereignty  slavery  received 
a  new  lease  of  life,  and  became  lucrative  not  only  on  the 
Italian  mainland  but  in  the  great  stretches  of  subjugated  states. 
As  long  as  the  career  of  conquest  and  fresh  accessions  of 
territory  continued,  slavery  flourished.  In  the  same  way  the 
European  immigrants  into  the  new  world,  whose  ancestors  had 
just  seen  the  last  vestiges  of  forced  labor  disappear  at  home,  no 
sooner  reached  American  soil  than  they  introduced  in  all  its 
rigor  the  ancient  system  of  slavery.  If  the  system  dominated 
only  agriculture  and  not  industry,  it  is  to  be  ascribed  to  the 
fact  that  a  controlling  industrial  civilization  had,  for  reasons  to 
be  noted  in  a  moment,  evolved  from  the  stage  of  slavery  to  that 
of  freedom,  first  in  Europe  as  against  the  colonies  in  general, 
and  then  in  the  North  as  against  the  South.  It  was  cheaper 
for  the  South  to  buy  its  industrial  products  in  the  free  North 
or  in  Europe  than  to  make  them  herself. 

67.   Decay  and  Disappearance  of  Slavery. 

To  the  same  cause,  the  conditions  of  supply  of  fresh  land, 
must  we  ascribe  the  decay  and  the  final  disappearance  of 
slavery.  When  the  supply  of  new  land  diminishes,  the  eco- 
nomic disadvantages  of  slavery  make  themselves  apparent. 
As  Cairnes  pointed' out,  there  are  three  defects  in  slave  labor  :  it 
is  given  reluctantly,  it  is  unskilful,  it  is  wanting  in  versatility. 
As  long  as  there  is  an  ample  supply  of  exuberantly  fertile  soil, 
superficial  cultivation  suffices.  But  with  every  decade's  culti- 


§  67]  Decay  of  Slavery.  159 

vation  of  the  same  plot  the  productivity  suffers  and  the  need 
of  more  unremitting  labor  appears.  The  landowner  now  finds 
it  to  his  interest  to  mitigate  the  rigors  of  slavery  and  by  per- 
mitting the  cultivator  to  do  some  work  on  his  own  account  to 
induce  him  to  labor  somewhat  more  strenuously  for  his  master. 
The  slave  in  Rome  gradually  turns  into  the  colonus,  just  as 
several  centuries  later  the  Anglo-Saxon  thegn  is  replaced  by 
the  villein,  —  the  slave  by  the  serf.  Serfdom  differs  from 
slavery  chiefly  in  that  the  individual  acquires  certain  personal 
rights  and  is  attached  to  the  soil.  He  goes  with  the  land,  but 
cannot  be  divorced  from  it.  The  serf  is  still  bound  to  work  a 
certain  part  of  his  time  for  the  landlord.  With  the  final  ex- 
haustion of  free  land,  however,  the  landlord  finds  that  he  can 
derive  more  profit  by  freeing  the  serf  completely  and  by  letting 
him  occupy  the  land  on  a  fixed  rental,  in  produce  or  in  money. 
This  process  is  gradual,  differing  according  to  the  general 
economic  conditions  of  each  country.  Ultimately,  however, 
the  last  trace  of  serfdom  disappears,  and  the  cultivator  becomes 
the  hired  man  or  the  free  tenant  farmer. 

There  are  generally  five  steps  in  this  transition  from  slavery 
to  liberty  :  (i)  the  acknowledgment  by  the  master  of  certain 
personal  rights  on  the  part  of  the  slave;  (2)  the  grant  to  the 
slave  of  certain  property  rights,  as  the  privilege  of  the  Roman 
slave  in  later  times  to  acquire  a  peculium  or  independent  fund 
by  working  in  his  leisure  moments  for  himself;  (3)  the  con- 
ferring of  the  privilege  of  marriage,  whereby  the  master  ab- 
dicates the  right  of  breeding  human  beings  like  animals ;  (4) 
the  manumission  of  the  slave,  while  reserving  certain  partial 
rights  to  his  services;  (5)  complete  emancipation  and  com- 
mutation of  all  services  into  a  fixed  money  rental. 

The  transition  from  slavery  to  serfdom  and  from  serfdom  to 
freedom  can  be  traced  in  Western  Europe,  where  the  increase 
of  population  and  the  resulting  diminution  of  fresh  land  forced 
the  adoption  of  better  methods  of  cultivation.  The  process 
was  accelerated  by  the  growth  of  a  free  industry  and  com- 
merce in  the  towns;  and  although  temporary  mutations 


160  Freedom.  [§  67 

caused  the  landowners  here  and  there  to  resist  emancipation, 
serfdom  was  finally  abolished,  either  because  it  was  no  longer 
really  profitable,  or  because  the  community  now  recognized 
the  greater  need  and  value  of  the  free  industrial  workman. 
In  the  first  case,  as  in  England,  serfdom  died  a  comparatively 
quiet  death ;  in  the  second  case,  as  on  the  Continent,  where 
the  landowners  were  more  tenacious  of  their  rights,  it  needed 
a  revolution  to  bring  about  the  disappearance  of  the  last  traces 
of  serfdom. 

In  America,  where  at  first  only  the  fringe  of  the  arable  area 
was  occupied,  the  resulting  inability  to  secure  an  adequate 
labor  force  through  free  workmen,  apprentices  or  redemp- 
tioners  soon  led  to  the  adoption  of  slavery,  first  of  Indians, 
then  of  negroes.  In  the  Northern  states,  where  the  land  was 
poor  and  a  better  cultivation  necessary,  slavery  never  took  a 
deep  hold  except  on  the  plantations  of  Narragansett  Bay  and 
of  the  Hudson  valley.  In  the  South  both  climate  and  soil 
made  slavery  profitable.  As  the  seaboard  lands  became 
poorer,  the  continuance  of  slavery  depended  on  the  continual 
acquisition  of  fresh  lands,  —  a  fact  that  led  to  the  Mexican  war 
and  the  attempts  to  secure  Cuba.  The  opening  of  the  lower 
Mississippi  valley  so  augmented  the  price  of  slaves  that  not 
only  the  older  seaboard  states,  but  even  many  of  the  hill  sec- 
tions of  the  interior  commonwealths  where  slavery  would  never 
have  developed  of  its  own  accord,  now  found  it  to  their  inter- 
est to  raise  slaves  for  the  market ;  and  from  that  time  the 
entire  South  was  practically  a  unit  in  favor  of  the  "  peculiar 
institution."  The  South  was  forced  into  the  conflict  because 
it  well  realized  that  without  fresh  supplies  of  land  slavery  was 
doomed. 

Emancipation  came  as  a  war  measure ;  but  even  without 
emancipation  at  that  time  slavery  would  soon  have  disappeared. 
Left  to  itself,  without  any  chance  of  territorial  expansion  in 
the  presence  of  a  more  vigorous  and  free  industrial  system, 
slavery  would  slowly  have  become  unprofitable,  and  would 
have  changed  into  some  form  of  serfdom  to  be  ultimately 


§67]  Decay  of  Slavery.  161 

merged  into  the  more  remunerative  system  of  freedom.  Lin- 
coln's proclamation,  like  the  Czar's  ukase  of  the  same  decade, 
accomplished  by  a  stroke  of  a  pen  what  it  had  taken  Western 
Europe  centuries  to  attain.  In  America  the  transition  was  an 
economic  revolution,  in  Russia  a  reform,  because  in  the  one 
country  slavery,  and  in  the  other  serfdom,  was  abolished.  In 
both  cases  the  change  in  the  law  only  slightly  anticipated  the  in- 
evitable result  of  a  fast-approaching  change  in  the  economic  facts. 

The  disappearance  of  slavery  is  therefore  not  due  primarily 
to  moral  teachings.  The  greatest  moral  philosophers  of  Greece 
defended  slavery  because  they  could  not  conceive  of  a  social 
system  without  it;  the  clergymen  of  the  South  honestly  ap- 
pealed to  the  Bible  because  in  their  opinion  it  was  necessary 
to  social  stability.  The  ethical  defects  of  slavery  were  men- 
tioned by  many  Roman  writers,  but  it  was  not  until  its  eco- 
nomic shortcomings  were  realized  by  teachers  and  public 
alike  that  slavery  disappeared.  The  civil  war  was  indeed 
borne  on  the  waves  of  a  great  moral  uprising,  but  human 
nature  in  the  North  was  no  different  from  that  in  the  South, 
and  had  the  climatic  and  economic  conditions  of  the  North 
been  like  those  of  the  South,  there  would  have  been  no  such 
moral  uprising.  A  higher  morality,  it  is  true,  continually  trans- 
forms social  life,  but  in  order  to  accomplish  lasting  results  it 
must  be  in  intimate  touch  with  the  great  underlying  economic 
facts. 

With  the  virtual  exhaustion  of  free  land,  slavery  in  modern 
society  has  gone,  never  to  return.  It  is  only  in  a  few  of  the 
tropical  colonies  where  land  is  still  abundant  that  there  is  any 
possibility  of  its  continuance  ;  and  if  the  colonies  did  not  form 
so  relatively  insignificant  an  appendage  of  modern  industrial 
states,  the  possibility  might  become  a  probability.  It  is  un- 
likely that  we  shall  see  anything  more  severe  than  the  carefully 
regulated  contract  labor  of  some  of  the  English  possessions. 
Even  here,  however,  as  well  as  in  the  case  of  the  "culture  "  sys- 
tem of  Java  and  the  peonage  of  Spanish  America,  care  must  be 
taken  not  to  permit  a  relapse  into  a  state  of  virtual  serfdom. 

ii 


1 62  Freedom.  [§67 

Slavery  and  serfdom  have  been  defended  on  five  grounds. 
( i )  It  is  claimed  that  slavery  is  preferable  to  cannibalism  ;  that 
it  is  a  great  advance  to  spare  the  victim  rather  than  to  eat  him. 
It  is  forgotten,  however,  that  when  the  great  development  of 
slavery  came,  the  enslaving  part  of  mankind  had  long  passed 
out  of  the  cannibal  stage.  (2)  It  is  contended  that  slavery 
protects  labor,  and  that  in  the  middle  ages,  for  instance,  pro- 
tection was  more  important  than  freedom.  This  is,  however, 
an  assumption  which  from  the  point  of  view  of  the  workman 
cannot  be  proven.  (3)  It  is  said  that  slavery  inculcates  the 
habit  of  work.  There  is  no  doubt  that  some  of  the  negroes 
were  drilled  into  comparative  thrift  and  orderliness  in  the 
South.  But  this  assumes  that  nothing  else  would  effect  the 
same  result,  —  an  assumption  belied  in  all  countries  where  free 
labor  has  developed  independently.  It  also  forgets  that  some 
of  the  negroes  came  from-  tribes  where  work  was  by  no  means 
unknown.  (4)  It  is  asserted  that  slavery  permits  the  evolution 
of  a  leisure  class.  This,  again,  is  based  on  aristocratic  postu- 
lates. It  completely  ignores  the  possibility  of  a  democratic 
development  where  leisure  and  culture  will  no  longer  be  the 
possessions  of  a  favored  few.  (5)  Finally,  it  is  claimed  that 
compulsory  labor  is  necessary  for  the  economic  progress  of 
countries  where  the  natives  will  not  work.  This  argument 
overlooks  the  fact  that  the  ultimate  end  of  economic  progress 
is  man  rather  than  wealth,  and  that  every  resource  of  modern 
civilization  in  the  line  of  industrial  and  technical  education 
must  first  be  exhausted  before  the  claim  can  be  admitted. 
Labor  is  indeed  necessary  for  economic  progress,  but  a  so- 
called  progress  which  rests  on  the  perpetual  exploitation  of  the 
laborer  is  not  worth  having.  Slavery,  whether  total  or  partial, 
exerts  its  pernicious  and  insidious  influence  on  slave  and 
slaveholder  alike.  The  modern  conscience  refuses  to  permit 
it,  and  fortunately  the  economic  facts  are  almost  everywhere  in 
harmony  with  the  modern  conscience.  These  economic  facts 
rest  on  the  disappearance  of  free  land. 


§  68]  Economic  Liberty.  163 

68.   Liberty  of  Economic   Action. 

While  bodily  freedom  is  thus  the  result  of  a  slow  develop- 
ment, the  liberty  of  economic  action  in  general  is  also  a  recent 
product.  Economic  liberty  of  both  kinds  has  been  evolved 
because  it  has  been  recognized  as  conducive  to  wealth  and 
general  progress  under  modern  conditions.  As  opposed  to 
the  theories  of  ancient  and  mediaeval  absolutism,  with  its  con- 
tinual interference  in  the  economic  life  of  the  individual,  the 
modern  doctrine  is  that  a  man  may  commonly  be  depended 
upon  for  utilizing  his  opportunities  and  turning  his  energies  to 
the  best  account ;  that  an  adult  of  sound  mind  usually  knows 
what  is  most  advantageous  for  him,  and  that  in  making  the 
most  effective  use  of  his  own  abilities  he  will  ordinarily  do  the 
best  for  the  community.  It  involves  the  substantial  identity 
of  private  interest  and  public  welfare,  and  it  is  to-day  almost 
everywhere  in  the  civilized  world  either  dn  accomplished  fact 
or  a  cherished  ideal. 

If  we  look  more  closely,  however,  we  shall  find  that  free- 
dom is  more  than  the  mere  absence  of  restraint  or  interference. 
In  contrast  to  this  mere  negative  conception  of  liberty,  as 
advanced  by  Spencer  and  adopted  by  the  average  man,  we 
must  put  the  positive  conception  as  framed  by  Green  and 
elaborated  by  recent  thinkers.  Economic  freedom,  like  all 
liberty,  is  not  an  attribute  of  primitive  man,  but  has  been  ham- 
mered out  by  centuries  of  toilsome  effort.  Individual  liberty  is 
the  product  of  social  effort.  If  it  is  to  be  a  constructive  rather 
than  a  destructive  force,  if  it  is  to  minister  to  social  progress 
rather  than  to  social  dissolution,  it  must  be  accompanied  by 
two  other  conditions. 

Of  these  the  first  is  equality.  By  equality  we  do  not  mean 
absolute  equality.  A  certain  degree  of  inequality  inheres  in 
the  nature  of  things.  Men  are  born  with  an  inequality  of 
physical,  mental  and  moral  attributes  which  no  amount  of  care 
can  eradicate ;  and  as  soon  as  private  property  develops,  these 
natural  inequalities  inevitably  produce  their  results  in  inequality 


164  Freedom.  [§68 

of  possessions.  The  real  equality  that  is  important  for  eco- 
nomic purposes  is  threefold :  first,  legal  equality,  or  the  cer- 
tainty that  one  man  is  as  good  as  another  before  the  law, 
and  that  his  economic  rights  will  be  equally  protected ;  sec- 
ondly, equality  of  opportunity,  in  the  sense  that  no  man  is  shut 
out  by  legislation  or  social  prejudice  from  free  access  to  any 
vocation  or  employment  for  which  he  deems  himself  fitted ; 
thirdly,  such  a  relative  equality,  at  least  in  the  conditions  of 
bargaining,  as  not  to  put  one  party  to  the  contract  at  the  vir- 
tual mercy  of  the  other.  Without  such  a  threefold  equality 
freedom  becomes  illusory ;  for  liberty  based  on  gross  inequality 
means  the  liberty  of  the  stronger  and  more  unscrupulous  to 
impose  his  will  on  the  weak.  Liberty  without  equality  is  the 
power  of  the  one,  but  the  subjection  of  the  other.  The  liberty 
to  invest  one's  capital  in  slaves  was  stoutly  defended  by  the 
ante-bellum  Southerner,  but  his  liberty  involved  the  other's 
slavery. 

In  addition  to  equality  the  growth  of  competition  and  the 
complexity  of  modern  economic  life  have  brought  into  promi- 
nence a  second  condition  of  liberty.  The  enormous  power 
exerted  to-day  by  the  accumulations  of  capital  as  well  as  by  the 
combinations  of  labor  is  in  the  present  state  of  human  devel- 
opment peculiarly  susceptible  of  abuse.  These  abuses  may  be 
within  the  margin  of  the  law,  and  yet  none  the  less  socially 
reprehensible.  Unless  great  power  is  tempered  by  responsi- 
bility, it  is  apt  to  run  wild.  We  are  beginning  to  hear  of  the 
responsibilities  of  wealth,  but  the  adage  noblesse  oblige  applies 
to  all  forms  of  economic  power,  whether  represented  by  wealth 
or  not.  What  is  needed,  and  what  is  gradually  being  devel- 
oped, is  the  sense  of  social  solidarity ;  in  other  words,  the 
conviction  that  no  one  can  really  dissociate  himself  from  the 
welfare  of  his  neighbors,  and  that  his  every  action  must  be 
judged  by  its  influence  on  society  at  large.  It  was  this  idea 
that  found  vague  expression  in  the  "  fraternity  "  of  the  French 
revolution ;  it  is  the  same  idea  that  is  again  more  forcibly 
advanced  to-day  under  other  names.  The  application  in  the 


§69]          Kinds  of  Economic  Freedom.        165 

economic   sphere    is  no    less  valid    than    in  others.     Liberty 
without  responsibility  is  license. 

Real  economic  liberty,  therefore,  is  constructive  in  that  it 
implies  not  simply  an  absence  of  restraint,  but  such  a  positive 
complex  of  conditions,  resting  on  law  and  custom,  as  to  insure 
to  the  greatest  possible  number  the  opportunity  of  a  free 
development  of  their  faculties.  Liberty,  when  based  on  equal- 
ity and  responsibility,  means  wealth  for  the  individual  and 
progress  for  society ;  liberty  without  equality  and  responsibility 
may  mean  advance  for  the  few  and  retrogression  for  the 
many.  Liberty  as  a  negative  concept  is  disruptive ;  liberty 
as  a  positive  concept  harmonizes  society  and  the  individual ; 
the  one  is  a  menace,  the  other  an  aid,  to  lasting  economic 
progress. 

69.   Various  Kinds  of  Economic  Freedom. 

(i)  The  first  and  most  obvious  form  of  freedom  is  that  of 
marriage  and  divorce.  Marriage  indeed  is  far  more  than  an 
economic  contrivance,  even  though  the  historical  forms  of 
marriage  have  been  influenced  by  economic  forces  to  a  greater 
extent  than  is  commonly  recognized.  Freedom  of  marriage 
especially  is  a  -product  of  the  modern  economic  life.  Restric- 
tions on  the  right  of  marriage  were  in  the  middle  ages  an 
attribute  of  personal  subjection,  and  were  utilized  as  fiscal 
resources  by  the  lord.  Even  with  the  advent  of  physical  free- 
dom, however,  we  find  the  right  of  marriage  dependent  on 
certain  property  qualifications,  as  in  Southern  Germany  at  the 
beginning  of  the  nineteenth  century.  This  also  was  merely  a 
survival  of  aristocratic  traditions,  —  like  the  still  existing  prop  - 
erty  qualifications  for  marriage  in  the  case  of  army  officers  in 
continental  Europe.  Freedom  of  divorce,  on  the  other  hand, 
existed  in  early  society,  but  was  at  first  based  on  inequality. 
After  the  patriarchal  and  modern  family  had  been  constituted 
the  husband  could  divorce  the  wife,  but  not  vice  versa.  The 
newer  right  of  divorce  which  rests  on  equality  is  in  large 
measure  the  -result  of  the  economic  emancipation  of  woman. 


1 66  Freedom.  [§  69 

Into  the  wider  ethical  and  religious  aspects  of  this  great 
problem  the  present  is  not  the  place  to  enter. 

(2)  Next  we  have  freedom  of  movement.  In  the  middle 
ages  the  right  of  internal  migration  was  often  restricted. 
Under  the  settlement  laws  in  England,  for  instance,  it  was 
virtually  impossible  for  a  workman  to  leave  his  native  parish. 
In  modern  times  the  growth  of  freedom  has  brought  the  right 
not  only  of  internal  but  of  international  migration.  The 
restrictions  on  emigration  still  existing  in  Russia,  for  instance, 
are  a  relic  of  medievalism.  On  the  other  hand,  the  prohibition 
of  immigration  which  is  sometimes  found  in  modern  countries 
must  be  judged  in  the  light  of  liberty  in  the  positive  sense,  as 
explained  in  the  preceding  section.  Chinese  immigration  into 
the  United  States,  for  instance,  is  forbidden.  Cheap  Chinese 
labor  would  undoubtedly  help  in  developing  the  resources  of 
the  Pacific  slope ;  but  the  vital  objection  to  it  is  the  permanent 
inequality  between  the  Chinese  and  the  American  workman. 
Immigration  in  general  is  to  be  welcomed  in  a  young  coun- 
try like  America  with  relative  underpopulation,  because  even 
though  the  standard  of  life  of  the  immigrant  may  be  lower 
than  that  of  the  native,  he  or  his  children  will  soon  reach  the 
American  level.  The  Chinaman,  however,  refuses  to  assimilate, 
and  will  not  adopt  American  methods.  He  retains  and  per- 
petuates his  lower  standard,  and  thus,  if  present  in  sufficient 
numbers,  would  inevitably  drag  the  American  standard  down  to 
his  own  level.  Freedom  of  immigration,  which  in  this  case 
means  prosperity  for  the  employer  and  comparative  comfort 
for  the  immigrant,  implies  permanent  degeneration  for  the 
American  workman  and  thus  ultimate  economic  decay.  It  is  a 
specious  liberty,  because  based  on  inequality. 

When,  however,  there  is  any  prospect  of  speedy  equality  and 
the  immigration  is  not  artificially  fostered  by  foreign  govern- 
ments or  interested  transportation  agencies,  interference  with 
the  freedom  of  immigration  is  uneconomic.  This  was  the 
error  of  the  Know-nothings  in  the  fifties,  as  it  is  of  the  anti- 
immigrationists  at  present  in  the  United  States.  That  the  low- 


§  69]        Kinds  of  Economic  Freedom.         167 

class  immigrant  is  the  chief  source  of  supply  of  the  sweat-shops 
and  in  many  respects  complicates  the  labor  problem  is  un- 
doubtedly true  and  ominous.  The  remedy,  however,  consists 
not  in  abolishing  immigration,  or  even  in  restricting  it  ma- 
terially, but  in  raising  the  standard  of  pay  and  conditions  of 
work  through  labor  organization,  public  opinion  and  legal  en- 
actment, and  in  making  this  possible  by  increased  production 
and  successful  enterprise.  In  a  country,  indeed,  where  the 
labor  market  is  already  overstocked,  the  force  of  this  argu- 
ment will  be  much  impaired.  But  the  time  has  not  yet  come 
in  the  United  States  when  the  immigrant  in  general  is  to  be 
shut  out  or  his  advent  materially  restricted. 

(3)  We  come   next  to  the  freedom   of  occupation.     The 
right  of  choosing  one's  profession  was  in  former  times  hedged 
in  by  all  manner  of  barriers.     At  its  worst  the  system  of  caste 
and  custom  prevented  progress  because  it  put  men  into  voca- 
tions for  which  they  were  not  fitted.     Freedom  of  occupation 
insures  as  far  as  possible  the  right  man  for  the  right  place,  and 
this   leads  to   enhanced   production   and    better   distribution. 
The  only  restriction  which  modern  society  permits  is  the  evi- 
dence of  fitness,  in  those   occupations  where   incompetence 
would  imply  irresponsibility  and  involve  injury  to  others  as  well 
as  to  oneself.     The  certificates,  required  from  doctors,  dentists, 
engineers,  plumbers,  pilots  and  the  like  are  not  a  hindrance, 
but  an  aid,  to  true  liberty.     The  apprenticeship  regulations  of 
the  trades  unions,  however,  are  sometimes  good,  sometimes  bad. 
Where  they  are  designed  to  insure  good  work,  or  even  to  pre- 
vent the  degradation  of  wages  and  the  workman's  standard  of 
life  through  the  irruption  of  large  numbers  of  underpaid  ap- 
prentices, there  is  much  to  be  said  for  the  practice.     But  when 
the  object  is  simply  to  keep  out  competent  workmen  and  to 
erect  a  monopolistic  closed  corporation,  as  in  the  late  stages 
of  the  guild  system,  the  limitation  is  clearly  indefensible. 

(4)  Another  kind  of  freedom  is  the  freedom  of  association. 
The  chief  forms  of  association  for  economic  purposes  are  com- 
binations of  labor  and   combinations  of  capital.     In  classic 


1 68  Freedom.  [§  69 

Rome,  as  in  modern  Russia,  where  both  political  and  economic 
aims  were  sought  we  find  a  stern  repression  of  labor  associa- 
tions. Even  after  the  right  of  political  and  religious  associa- 
tion had  been  won,  however,  combinations  of  labor  were 
prohibited.  Under  the  modern  factory  system  such  combina- 
tions have  assumed  the  form  of  trades  unions.  It  was  not  until 
1824  in  England,  and  considerably  later  in  America  and  con- 
tinental Europe,  that  the  prohibition  was  removed.  The  legiti- 
macy of  union,  as  such,  is  now  accepted  because  it  is  recognized 
that  it  tends  to  secure  the  real  freedom  of  the  laborer.  The 
individual  workman  in  a  large  factory  is  at  a  clear  disadvantage 
in  dealing  with  the  employer ;  the  union,  as  we  shall  see 
(§  182),  restores  the  equality  by  securing  the  right  of  collective 
bargaining.  In  the  same  way  the  right  of  free  association  of 
capital  in  the  form  of  corporations  and  other  combinations  has 
been  acquired  chiefly  in  the  past  half-century.  Here  again, 
however,  when  the  nominal  liberty  of  association  results  in  a 
"  restraint  of  trade  "  or  virtual  monopoly  inimical  to  the  general 
interests,  the  community  is  justified  in  curbing  its  excesses 
whenever  the  contest  involves  a  crass  inequality  or  is  con- 
ducted without  any  sense  of  social  responsibility.  The  greatest 
care,  however,  must  be  observed  in  the  analysis  before  the  in- 
fringement of  the  right  of  association  can  be  conceded.  To 
abandon  liberty  because  of  a  mere  apprehended  but  imaginary 
inequality  would  be  to  sacrifice  both  liberty  and  equality.  A 
clear  case  must  be  made  out  before  the  law  should  be  invoked 
against  the  combinations  of  either  labor  or  capital. 

(5)  The  fifth  category,  freedom  of  consumption,  needs  only 
a  word-in  this  place.  The  sumptuary  laws  of  old  which  pre- 
scribed in  detail  what  should  be  eaten  or  worn  were  sometimes 
well  intentioned,  but  always  mistaken.  By  restricting  the  ex- 
pansion of  wants,  they  really  checked  economic  progress. 
Modern  society  has  abandoned  such  a  system  completely,  and 
where  it  becomes  desirable  in  the  interests  of  the  public  health 
or  safety  to  prohibit  the  use  of  certain  commodities,  like  over- 
ripe fruit,  or  infected  meat,  or  opium,  the  end  is  attained  far 


§  69]        Kinds  of  Economic  Freedom.         169 

better  by  a  prohibition  of  sale,  under  the  police  power  of  the 
state,  than  by  a  restriction  of  consumption. 

(6)  We  come,  sixthly,  to  freedom  of  production,  including 
freedom  of  contract  and  enterprise.  Here,  again,  the  emphasis 
has  been  shifted  in  modern  times.  The  world  has  outgrown 
the  time-worn  conception  of  the  citizens  as  the  children  of  an 
all-wise  and  benevolent  paternal  government.  It  has  been 
realized  that  governments  are  not  always  benevolent  and  never 
all-wise,  and  that  with  the  growth  of  capital  and  competition 
better  results  can  be  secured  by  the  repeal  of  the  complicated 
and  often  contradictory  provisions  which  throttle  production 
and  check  individual  initiative.  It  was  this  that  the  French 
manufacturers  meant  when  they  told  Colbert  "  laissez-nous 
faire "  and  thus  introduced  a  celebrated  phrase.  That  was 
indeed  the  necessary  destructive  process  of  pulling  down  the 
barriers  which  impeded  progress  because  they  checked  equal 
opportunity.  It  has  been  found  requisite,  however,  in  recent 
times  to  modify  both  the  theory  and  the  practice  of  laissez- 
faire  in  order  to  safeguard  the  interests  of  various  classes  of 
society.  The  complex  requirements  of  modern  life  have  ne- 
cessitated a  governmental  regulation  of  many  business  enter- 
prises in  behalf  of  producers,  of  consumers,  of  investors  or  of 
the  general  public.  The  difference  between  mediaeval  and 
modern  interference  is  to  be  found  chiefly  in  the  fact  that  the 
one  sought  to  prevent  competition  while  the  other  endeavors 
to  enlarge  its  domain  and  to  raise  its  level.  The  only  excep- 
tion to  the  rule  that  rational  modern  interference  is  not  de- 
signed to  prevent  competition  is  found  in  those  few  cases 
where  competition  itself  becomes  wasteful  and  inefficient. 
The  modern  aim,  however,  is  always  to  increase  liberty 
through  the  attainment  of  equality  and  responsibility.  Factory 
laws  give  the  operatives  a  fair  chance  ;  railway  regulation  at- 
tempts to  secure  equal  treatment  of  shippers ;  supervision  of 
banks,  insurance  companies  and  other  corporations  is  designed 
to  enforce  financial  responsibility.  In  all  these  cases  interfer- 
ence is  justified  only  as  leading  to  a  surer  and  greater  general 


170  Freedom.  [§  70 

liberty.     We  have  to  deal  with  the  positive,  not  the  negative 
conception. 

(7)  Finally,  we  have  freedom  of  trade.  This  is  virtually 
included  under  the  last  head,  since  trade  is  a  species  of  pro- 
duction. It  forms,  however,  so  important  a  part  of  the  subject 
that  it  has  generally  been  treated  separately.  The  modern  age 
has  seen  the  emancipation  of  internal  commerce  from  mediaeval 
restrictions  of  all  kinds.  The  great  controversy  to-day  centres 
about  international  trade.  Here,  again,  the  general  hypothesis 
must  be  in  favor  of  freedom.  Free  trade,  however,  is  not 
necessarily  and  always  beneficent.  If  the  relative  inequality  of 
two  countries  in  the  production  of  a  certain  commodity  is 
great,  free  trade  may  hinder  in  the  weaker  country  the  growth 
of  an  industry  which  might  become  relatively  profitable  or  even 
highly  necessary.  Under  such  conditions  protection,  by  build- 
ing up  the  industry  to  the  point  where  there  will  be  a  domestic 
competition,  may  help  in  creating  that  relative  equality  between 
the  domestic  and  the  foreign  producer  which  will  ultimately 
redound  to  the  interests  of  the  consumer  as  well.  As  we  shall 
see  later,  however  (§  205),  such  a  policy  is  defensible  only 
when  protection  actually  increases  real  productive  efficiency, 
and  when  the  undoubted  intermediate  economic  loss  does  not 
outweigh  the  ultimate  advantage.  Only  in  such  a  case  is  in- 
terference with  freedom  legitimate,  because  only  then  is  it  in 
the  interests  of  a  more  real  and  beneficent  ultimate  freedom. 

70.    Individual  Liberty  as  a  Social  Concept. 

We  see,  then,  that  in  modern  life  liberty  is  a  result  rather 
than  a  cause.  It  does  not  mean  simply  the  absence  of  restraint ; 
for  that  is  license,  not  liberty.  All  social  progress  is  the  result  of 
a  certain  restriction  of  the  liberty  of  some  in  the  interest  of  all. 
These  restrictions  are  imposed  by  custom,  by  voluntary  associ- 
ation, by  law.  Good  manners  and  social  usages  which  prevent 
men  from  doing  what  they  like  are  a  mark  of  civilization. 
Associations  like  the  church,  the  clubs  and  business  unions  lay 
down  rules  to  which  each  member  must  conform.  Government 


§  70]  Individual  Liberty.  171 

enacts  many  laws  whose  wisdom  is  unquestioned  and  obedience 
to  which  is  compulsory.  In  every  case  there  is  necessarily  an 
infraction  of  liberty  in  the  crude  sense.  Moreover,  especially 
in  industrial  matters,  the  cry  of  individual  liberty  often  becomes 
a  mere  shibboleth  invoked  by  the  individuals  against  others 
instead  of  themselves.  The  railway  magnate  restricts  his  own 
liberty  by  pooling  arrangements,  but  objects  to  interference  by 
the  shipper.  The  slave  owner  wanted  freedom  of  trade,  but 
scouted  freedom  of  man.  The  manufacturer  demands  protec- 
tion against  his  foreign  competitor,  but  objects  to  factory  laws. 
The  cotton  grower  acclaims  the  rise  of  prices  brought  about 
by  manipulation  on  the  exchange,  while  the  spinner  decries 
the  liberty  of  speculation.  The  factory  owner  joins  the  selling 
bureau  which  restricts  output  or  fixes  prices,  but  objects  to  the 
"  tyranny  "  of  the  labor  union.  The  labor  union  adopts  pro- 
visions relating  to  apprenticeship,  the  open  shop  and  the  boy- 
cott, but  opposes  lockouts  and  trusts.  The  lawyer  refuses  to 
consort  with  the  "  shyster "  and  the  doctor  with  the  quack, 
because  they  desire  to  maintain  the  standard  of  their  profes- 
sions ;  but  they  sternly  reprobate  the  effort  of  the  trades  union- 
ist to  prevent  the  "  scab "  from  reducing  the  level  of  his 
occupation. 

Liberty,  then,  must  be  looked  at  from  the  social  as  well  as 
from  the  individual  point  of  view.  The  individual  has  become 
what  he  is  largely  through  associated  effort.  This,  however, 
inevitably  implies  a  certain  subjection  of  the  individual  to  the 
group.  The  liberty  which  is  compatible  with  social  progress 
involves  the  readiness  of  the  individual  to  work  for  a  common 
end.  If  this  readiness  is  not  voluntary,  it  must  be  developed 
by  persuasion  or  by  force.  All  liberty  is  a  balancing  between 
the  powers  of  anarchy  and  of  tyranny.  Individual  freedom 
that  is  oblivious  of  the  rights  of  others  or  of  the  best  interests 
of  the  majority  leads  to  an  anarchy  that  is  destructive  of  real 
liberty ;  group  restrictions  that  are  forgetful  of  the  possibilities 
of  the  individual  lead  to  a  tyranny  that  is  equally  destructive 
of  real  liberty.  From  the  economic  point  of  view  only  that  is 


172  Freedom.  [§  70 

real  freedom  which  is  calculated  to  reconcile  the  greatest 
possible  production  in  the  group  with  the  greatest  possible 
consumption  of  every  individual  within  and  without  the  group. 
The  liberty  of  one,  therefore,  must  not  endanger  the  economic 
progress  of  others. 

Just  as  the  political  interpretation  of  liberty  is  democracy  in 
government,  so  the  economic  liberty  which  is  conducive  to 
progress  can  exist  only  with  a  relative  economic  democracy. 
It  implies  at  least  economic  opportunity,  and  opportunity 
depends  on  a  certain  degree  of  equality  and  responsibility. 
In  this  sense  the  best  government  is  not  that  which  governs 
least,  but  the  one  which  secures  the  surest  conditions  of  a 
wider  ultimate  freedom.  Economic  liberty  in  the  last  analysis 
is  the  result  of  action,  not  of  inaction. 


Part   III. 

Structure  and  Process  of  Economic   Life. 

Book  I. 
Value :  General  Principles. 


CHAPTER  XII. 
THE   MEANING   OF   VALUE. 

71.  References. 

W.  Smart,  Introduction  to  the  Theory  of  Value  (1891),  chs.  ii-viii;  J.  B. 
Clark,  Philosophy  of  Wealth  (1886),  ch.  v,  and  Distribution  of  Wealth 
(1899),  c^s-  xv-xvii;  M.  Pantaleoni,  Pure  Economics  (1899),  part  i,  ch. 
iv;  A.  Marshall,  Principles  (1898),  bk.  iii ;  N.  G.  Pierson,  Principles 
(1902),  part  i,  ch.  i,  §  3;  W.  S.  Jevons,  Theory  (1888),  ch.  iii;  F.  A. 
Fetter,  Principles  (1904),  part  i,  div.  A;  T.  N.  Carver,  Distribution 
(1904),  ch.  i;  H.  Sidgwick,  Principles  (1883),  bk.  i,  ch.  ii;  A.  W.  Flux, 
Economic  Principles  (1904),  ch.  ii ;  E.  v.  Bohrrt-Bawerk,  Positive  Theory  of 
Capital  (1891),  bk.  iii,  chs.  i-ix ;  F.  v.  Wieser,  Naltiral  Value  (1893), 
bk.  i;  C.  M.  Walsh,  Measurement  of  General  Exchange  Value  (1901), 
ch.  i;  L.  M.  Keasbey,  Prestige  Value  (Quart.  Jour.  Econ.,  XVII,  1903). 

72.   Original  Meaning  of  Value. 

Value  is  the  Latin  term  corresponding  to  the  Saxon  "  worth." 
The  fundamental  idea  which  underlies  worth  is  capacity  to 
satisfy  a  want.  If  we  need  a  nail,  but  find  a  broken  one,  we 
say  that  it  is  worth  nothing,  —  that  it  is  valueless,  or  not  avail- 

173 


i/4  Meaning  of  Value.  [§  72 

able,  for  our  purpose.  Value  or  worth  thus  implies  usefulness 
or  utility.  The  nail  is  valueless  for  us  ;  if  it  "  avails  "  nothing, 
it  is  of  no  use.  Since  value  implies,  capacity  to  satisfy  wants, 
there  are  as  many  kinds  of  value  as  there  are  classes  of  wants. 
Things  have  a  scientific  value,  an  aesthetic  value,  a  religious 
value,  a  philosophic  value,  a  political  value  and  so  on.  The 
value  with  which  economics  has  to  deal  is  economic  value,  — 
a  small  subdivision  of  the  whole.  As  this  is  a  treatise  on 
economics,  we  shall  hereafter  use  the  term  value  in  the  sense 
-of  economic  value,  that  is,  the  value  of  anything  for  economic 
purposes.  But  just  as  we  know  (§2)  that  the  economic  life 
is  not  the  whole  life,  so  we  must  not  confound  economic  value 
with  value  in  general.  When  we  defined  economics  at  the 
close  of  section  4  as  the  science  of  value,  it  must  be  remem- 
bered that  what  is  meant  is  the  science  not  of  all  value,  but 
only  of  economic  value. 

Incidentally  we  may  point  out  the  original  dependence  of 
moral  considerations  on  economic  facts.  A  thing  was  at  first 
"  good  "  in  the  economic  sense,  as  we  still  employ  the  phrase 
a  stock  of  goods  and  commodities.  The  ethical  use  of 
good  came  much  later.  In  popular  parlance  we  still  speak 
of  the  broken  nail  as  "  no  good,"  without  desiring  to  pass 
any  moral  judgment  on  it.  In  the  same  way  the  original 
concept  of  "  dear  "  was  not  ethical,  but  economic.  A  com- 
modity may  still  be  dear  even  if  we  do  not  love  it.  So  also 
what  is  ethically  precious  to  us  was  originally  of  economic 
importance  ;  we  still  speak  of  precious  stones  in  this  economic 
sense.  To-day  we  esteem  somebody,  when  originally  we  put  a 
money  value  on  him  (aestimare,  from  aes,  money).  In  mod- 
ern times  we  appreciate  a  quality,  but  at  first  we  set  a  price  on 
it  (ad-pretium).  In  fact,  so  fierce  was  the  struggle  for  exist- 
ence among  the  early  Romans,  so  important  for  their  very 
stability  was  the  quality  of  bravery,  that  the  thing  of  chief 
value  to  them,  the  characteristic  which  "  availed "  the  most, 
was  "valor,"  a  term  which  has  now  become  with  us  of  ex- 
clusively ethical  import. 


§  73]  Marginal  Utility.  175 

This  close  connection  of  ethics  and  economics  must,  how- 
ever, as  we  have  seen,  not  blind  us  to  the  fact  that  the  real 
subject  of  our  discipline  is  economic.  The  utility  with  which 
we  have  to  deal  is  the  economic  utility,  the  capacity  of  a 
thing  which  we  must  economize  in  order  to  satisfy  a  want. 
The  use  of  whisky  may  be  ethically  reprehensible,  but  as  long 
as  men  desire  it,  and  as  long  as  they  must  be  economical 
with  it,  that  is,  as  long  as  it  is  not  a  free  good,  but  an  economic 
good,  whisky  will  have  an  economic  usefulness,  —  it  will  be 
used  to  satisfy  the  craving  for  drink  ;  and  it  will  have  a  value 
in  the  market.  The  ethical  judgment  of  the  community  may 
indeed  affect  the  economic  situation.  The  practice  of  drink- 
ing to  excess  may  be  visited  with  such  severe  social  reproba- 
tion that  the  appetite  for  drink  may  be  held  in  check,  and 
the  utility  of  whisky  will  then  diminish  because  the  desire  for 
it  will  have  decreased.  The  study  of  human  wants  is  largely 
a  matter  of  social  psychology,  and  the  character  of  huma.n 
wants  is  continually  being  modified  by  moral  considerations ; 
but  when  we  are  dealing  with  the  serviceableness  of  a  com- 
modity for  satisfying  want,  we  are  operating  with  economic 
quantities.  The  economist  must  continually  bear  in  mind  the 
moral  aspects  of  the  situation  as  modifying  the  conditions; 
but,  the  conditions  once  given,  the  economic  problem  is  a  thing 
by  itself. 

As  a  preliminary  definition,  then,  we  may  say  that  the  value 
of  anything  is  the  expression  of  our  estimate  of  its  utility, 
meaning  by  utility  its  capacity  to  satisfy  human  wants. 

73.   Marginal  Utility—  The  Law  of  Diminishing  Utility. 

It  is  obvious  that  this  definition  is  incomplete.  Iron  is  more 
useful  than  diamonds,  yet  diamonds  are  incontrovertibly  more 
valuable.  In  what  sense  is  value  an  expression  of  utility  ? 

If  a  starving  wayfarer  suddenly  spies  an  apple,  it  will  have  a 
supreme  utility  for  him  because  it  stands  between  him  and 
death.  If  he  finds  a  second  apple,  it  will  still  be  welcome,  but 
will  fill  a  somewhat  less  intense  want.  With  every  additional 


176  Meaning  of  Value.  [§  73 

apple  his  appetite  will  be  more  appeased,  until  with  let  us  say  • 
the  tenth  apple  he  will  reach  the  point  of  satiety  and  be  on  the 
margin  of  doubt  whether  to  consume  any  more.  The  utility 
of  each  apple  —  its  capacity  to  satisfy  his  desire  —  has  di- 
minished until  the  tenth  apple  is  the  last  which  affords  any 
utility  at  the  moment.  The  utility  of  this  tenth  apple  is 
called  final  because  it  is  the  final  apple,  or  marginal  because 
on  the  margin  of  desire. 

It  is  plain  that  the  marginal  utility  of  any  apple  depends  on 
the  quantity  at  one's  disposal.  The  greater  the  quantity,  the 
less  keenly  will  he  feel  the  particular  want.  If  he  had  only 
five  apples,  the  marginal  utility  of  the  fifth  would  be  consider- 
able because  his  last  want  satisfied  would  still  be  urgent.  The 
degree  of  marginal  utility  depends  on  the  strength  of  the  want 
last  satisfied,  or,  it  might  be  said,  on  the  urgency  of  the  next 
unsatisfied  want. 

.The  second  point  to  be  noted  is  that  at  any  given  time  the 
utility  of  each  ap^)le  is  equal  to  that  of  the  last  and  therefore 
to  that  of  any  other  (of  the  same  size  and  quality).  If  the 
available  supply  is  five  apples,  any  one  of  the  five  apples  may 
be  considered  the  final  or  marginal  unit,  that  is,  the  last  unit  in 
point  of  time.  The  wayfarer  will  lay  his  hands  on  any  one  of 
the  five  without  particular  choice  ;  whether  he  begins  with  one 
or  with  another  is  immaterial,  because  he  knows  that  one  is  as 
good  as  another. 

Thirdly,  in  estimating  the  utility  of  the  entire  supply  of 
apples,  we  must  distinguish  between  the  total  utility  and  the 
marginal  utility  of  the  stock.  The  total  utility  of  a  stock  is 
obtained  by  adding  the  utility  of  each  additional  apple  to  that 
of  its  predecessor.  It  will  accordingly  grow  until  the  point  of 
satiety  has  been  reached.  Ten  apples  possess  more  total  utility 
than  five.  The  marginal  utility  of  the  stock,  however,  is  always 
equal  to  the  marginal  utility  of  the  final  unit  multiplied  by  the 
number  of  units.  The  marginal  utility  of  two  apples  will  be 
twice  that  of  the  second,  of  four  apples  four  times  that  of  the 
fourth.  Here,  as  before,  the  marginal  utility  of  the  stock  will 


§  73]  Marginal  Utility.  177 

increase,  but  not  up  to  the  point  of  satiety.  After  a  limit  has 
been  reached,  the  marginal  utility  of  a  stock  begins  to  decline. 
The  marginal  utility  of  eight  apples  may  be  less  than  that  of 
five,  even  though  the  total  utility  is  undoubtedly  more. 

This  can  be  made  clear  when  we  remember  that  we  have 
many  wants  and  that  the  degree  in  which  things  satisfy  our 
wants  depends  on  their  relative  importance.  In  addition  to 
apples,  the  wayfarer  needs  other  kinds  of  food,  clothing  and 
shelter.  If  he  has  only  five  apples,  his  desire  for  them  may  be 
so  strong  that  he  thinks  of  nothing  else ;  but  if  he  has  eight 
apples,  his  desire  for  the  apples  may  be  overtaken  by  his  desire 
for  let  us  say  three  articles  of  clothing.  If  there  were  a  hun- 
dred apples  at  his  disposal,  knowing  that  he  had  sufficient  for 
many  future  meals,  he  would  turn  his  attention  almost  entirely 
to  still  other  needs.  Air,  for  instance,  is  indispensable  to  life, 
but  it  is  so  abundant  that  it  has  no  marginal  utility  at  all.  If 
the  supply  of  air  was  shut  off,  however,  he  would  abandon  one 
by  one  his  other  needs,  until  finally  his  only  desire  would  be 
for  air.  In  other  words,  as  long  as  he  thinks  chiefly  of  apples, 
which  he  will  do  as  long  as  he  can  get  only  five,  he  wants  all 
five  ;  but  as  soon  as  he  thinks  of  other  things  (which  he  will  do 
when  there  are  say  eight  apples)  the  less  will  be  the  impor- 
tance which  he  will  attach  to  the  eight.  The  smaller  the  stock, 
the  more  rapid  will  be  the  rise  in  the  marginal  utility  of  each. 
If  in  the  case  of  five  apples  the  marginal  utility  of  each  is  five 
units  of  satisfaction,  that  of  the  stock  will  be  five  times  five,  or 
twenty-five ;  but  if  in  the  case  of  eight  apples  the  marginal 
utility  of  each  falls  to  three,  that  of  the  stock  will  be  eight 
times  three,  or  twenty-four.  Yet  the  total  utility  of  eight 
apples  is  certainly  more  than  that  of  five. 

It  is  important  to  note,  moreover,  that  the  word  margin 
is  used  in  two  senses,  or,  rather,  that  there  are  two  different 
kinds  of  margins.  When  we  speak  of  the  marginal  use  of  a 
commodity  to  any  one,  we  think  of  him  as  on  the  brink  of  not 
wanting  any  more.  He  may  reach  the  margin  because,  with 
the  diminishing  utility  of  each  increment,  he  will,  if  the  supply 

12 


178  Meaning  of  Value.  [§  73 

is  large  enough,  come  to  the  point  where  there  will  be  no 
consciousness  of  any  economic  usefulness  at  all.  The  margin 
becomes  a  margin  between  the  economic  world  and  the  non- 
economic  world,  a  margin  between  the  sphere  of  economizing 
and  that  of  unconcern  or  waste.  On  the  other  hand,  when  the 
supply  is  limited,  the  diminishing  utility  of  each  increment  will 
be  arrested  at  a  point  below  which  the  consumer  will  prefer  to 
abandon  the  use  of  an  increment  for  something  else.  The 
margin  here  is  a  margin  of  indifference  between  an  increment 
of  one  commodity  and  an  increment  of  another  commodity. 
Since  these  increments  are  not  necessarily  the  same,  the  mar- 
gin of  indifference  may  be  reached  at  a  point  where  the  tenth 
increment  of  one  commodity  balances  the  twentieth  of  another, 
where,  in  other  words,  the  marginal  utility  of  the  first  commodity 
is  twice  that  of  the  second.  Both  marginal  increments  will 
still  possess  a  positive  utility.  This  second  kind  of  margin  is 
an  economic  margin,  that  is,  a  margin  or  border  between  two 
or  more  economic  goods,  not  as  in  the  first  case  a  margin 
between  economic  and  non-economic  goods.  The  first  kind 
of  margin,  where  we  compare  different  increments  of  the  same 
thing,  may  be  called  the  non-economic  margin,  because  at  the 
margin  the  utility  is  zero  and  the  commodity  is  no  longer  an 
economic  good.  The  second  kind  of  margin,  where  we  com- 
pare the  same  or  different  increments  of  different  things,  may 
be  called  the  economic  margin,  because  at  the  margin  the 
utility  of  each  thing  is  still  measurable  and  appreciable.  We 
shall  have  repeated  occasion  to  call  attention  to  the  errors 
that  result  from  confusing  these  two  kinds  of  margins. 

To  recapitulate  :  the  utility  of  a  commodity  is  called  mar- 
ginal because  the  desire  for  additional  quantities  must  some- 
time reach  a  limit  or  margin  as  compared  with  the  desire  for 
other  commodities.  There  is  always  one  unit  in  the  supply 
which  marks  the  margin  of  this  desire  ;  and  with  every  change 
in  the  supply  or  the  desire,  the  margin  will  move  up  or  down. 
This  unit  is  called  the  marginal  unit  or  increment.  With  a 
fixed  quantity  the  utility  of  each  unit  or  increment  is  for  prac- 


§  74]  Individual  and  Social.  179 

tical  purposes  equal  to  that  of  the  marginal  unit,  because  if  any 
unit  were  withdrawn  the  final  unit  would  naturally  be  put  in  its 
place.  The  real  loss  would  be  the  loss  of  the  marginal  unit. 

Value,  then,  is  not  simply  the  expression  of  utility  in  general, 
but  of  marginal  utility.  When  we  speak  of  the  value  of  a  com- 
modity, we  think  not  of  its  usefulness  in  general,  but  of  the 
utility  of  a  definite  quantity ;  and  in  so  doing,  we  think  not  of 
the  total  utility  of  this  quantity  taken  by  itself,  but  of  its  mar- 
ginal utility  as  compared  with  that  of  a  definite  quantity  of 
other  commodities. 

74.   Individual  and  Social  Value. 

Value  as  a  universal  conception  would  be  true  of  the  indi- 
vidual living  apart  from  society,  if  there  were  any  such  beings. 
The  estimate  put  by  the  individual  on  one  commodity  as  com- 
pared with  another  is  the  foundation  of  all  value.  Robinson 
Crusoe  would  assign  a  value  to  apples  as  compared  to  nuts,  the 
value  of  each  being  in  agreement  with  their  marginal  utility  to 
him.  As  a  matter  of  fact,  however,  we  live  in  society,  not  on 
a  desert  island.  Economics,  as  a  social  science,  treats  of  the 
relation  of  man  to  man,  of  class  to  class.  The  value  with 
which  we  deal  is  therefore  the  result  of  social  forces.  It  is 
society  as  a  whole  which  sets  a  value  on  things.  Society  is 
indeed  composed  of  individuals,  but  it  is  the  aggregate  of  in- 
dividual wants  that  shapes  value.  The  want  of  the  individual 
affects  value  only  as  it  influences  this  aggregate.  If  a  rich 
maniac,  for  instance,  should  offer  a  thousand  dollars  for  a  com- 
mon spoon  for  which  every  other  person  would  give  only  five 
cents,  his  subjective  estimate  would  have  no  appreciable  in- 
fluence on  the  value  of  the  spoon,  and  if  he  actually  paid  a 
thousand  dollars,  society  would  be  justified  in  locking  him  up 
and  in  punishing  the  seller.  Of  course,  when  the  supply  of  an 
article  is  limited  and  the  desire  of  the  individual  such  that  the 
article  possesses  a  peculiar  utility  for  him,  not  shared  by  the 
rest  of  the  community,  his  subjective  estimate  may  seriously 
influence  its  value.  This  is  true,  however,  only  for  the  reason 


180  Meaning  of  Value.  [§  74 

that  because  of  the  limitation  of  supply  the  subjective  estimate 
of  the  single  individual  forms  so  large  a  part  of  the  collective 
desire.  To  get  my  ancestor's  watch  out  of  pawn,  I  may  pay 
if  necessary  far  more  than  its  value  to  any  one  else.  The 
border  between  an  enthusiastic  collector  and  one  with  a 
"  screw  loose  "  is  sometimes  a  narrow  one.  Ordinarily,  how- 
ever, the  desire  of  any  one  individual  forms  only  an  insignifi- 
cant part  of  the  collective  desire. 

Value,  therefore,  depends  upon  the  fact  not  only  that  each 
individual  measures  the  relative  urgency  of  his  own  various 
wants,  but  that  he  compares  them  consciously  or  unconsciously 
with  those  of  his  neighbors.  I  not  only  measure  the  relative 
satisfaction  that  I  can  get  from  apples  or  nuts,  but  the  quantity 
of  apples  I  can  get  for  the  nuts  'depends  on  the  relative  es- 
timate put  upon  both  by  the  rest  of  society.  If  an  apple  is 
worth  twice  as  much  as  a  nut,  it  is  only  because  the  group  that 
uses  both  apples  and  nuts  finds,  after  comparing  individual 
preferences,  that  the  desire  unsatisfied  by  the  lack  of  an  apple 
is  twice  as  keen  as  that  unsatisfied  by  the  lack  of  a  nut. 
Value,  therefore,  is  not  merely  the  expression  of  marginal  util- 
ity ;  it  is  the  expression  of  social  marginal  utility. 

This  serves  to  explain  how  a  thing  which  has  no  direct 
utility  to  the  individual  may  yet  possess  a  value  for  him.  If 
by  chance  I  secure  a  locomotive,  it  is  in  itself  useless  to  me. 
If,  however,  I  can  dispose  of  it  to  a  railroad  company,  it  acquires 
a  value,  because  in  other  hands  it  will  serve  a  social  purpose. 
The  locomotive  now  has  an  indirect  utility  for  me  because 
through  it  I  can  secure  things  of  direct  utility.  Its  indirect  in- 
dividual marginal  utility  to  me  is  the  result  of  its  direct  marginal 
utility  to  the  community,  that  is,  to  that  part  of  the  community 
where  marginal  comparisons  are  made  between  locomotives  and 
other  goods.  Of  all  the  valuable  things  in  existence  only  an 
infinitesimal  fraction  possesses  any  direct  utility  for  any  one 
man ;  yet  the  more  of  them  any  one  has,  the  richer  he  is,  pro- 
vided he  can  dispose  of  them  to  others.  Thus,  while  social 
utility  is  made  up  of  a  combination  of  individual  utilities  —  that 


§  74]  Individual  and  Social.  1 8 1 

is,  while  a  thing  cannot  be  useful  to  society  unless  it  is  useful  to 
the  individuals  that  compose  society — the  indirect  marginal 
utility  of  a  thing  to  any  individual  is  the  result  of  its  social 
marginal  utility.  To  a  member  of  society  the  indirect  mar- 
ginal utilities  form  the  chief  element  in  value.  Hence  in 
society  the  individual  marginal  utility  which  controls  value  may 
be  said  to  be  the  reflection  of  social  marginal  utility.  Our 
readiness  to  part  with  nuts  or  apples  will  depend  not  so  much 
on  the  degree  in  which  we  as  isolated  individuals  prize  nuts  as 
compared  with  apples,  but  chiefly  on  the  degree  in  which  other 
people  prize  apples  as  compared  to  nuts.  This  estimate  is  the 
controlling  consideration.  Value  is  a  result  of  the  community 
of  wants. 

The  problem  with  which  we  set  out  in  the  last  section  is  thus 
solved.  There  are,  in  fact,  two  solutions,  —  one  depending  on 
the  distinction  between  total  utility  and  marginal  utility,  the 
other  depending  on  the  distinction  between  individual  utility 
and  social  utility.  As  to  the  first,  iron  in  the  abstract  is  indeed 
more  useful  than  diamonds ;  but  a  pound  of  iron  does  not  sat- 
isfy as  many  or  as  urgent  wants  as  a  pound  of  diamonds,  and  it 
is  therefore  not  so  valuable,  even  to  an  isolated  individual. 
When  we  say  that  iron  is  more  useful  than  diamonds,  we  re- 
fer to  iron  in  the  abstract.  When  we  say  that  iron  is  less  val- 
uable than  diamonds,  we  refer  to  a  definite  quantity.  It  is 
therefore  true  that  a  commodity  may  possess  more  utility  and 
at  the  same  time  less  value  than  another ;  but  the  utility  to 
which  we  then  refer  is  not  the  marginal  utility.  The  total 
utility  of  eight  apples  is  greater  than  the  total  utility  of  five, 
but  the  marginal  utility  may  be  less.  When  the  Dutch  mo- 
nopolists destroyed  a  portion  of  the  colonial  pepper  crop  to 
increase  the  price,  the  total  utility  of  the  supply  fell,  but  its 
marginal  utility  and  its  value  rose. 

At  the  same  time  it  may  conceivably  happen  that  to  any  one 
individual  a  pound  of  iron  may  in  and  of  itself  be  more  useful 
than  a  pound  of  diamonds.  Yet  this  fact  will  not  control 
value.  For  the  indirect  utility  of  iron  is  far  greater  than  its 


1 82  Meaning  of  Value.  [§  75 

direct  utility,  in  precisely  the  same  way  that  the  wants  of  a 
community  are  more  important  than  the  wants  of  any  indi- 
vidual. Even  though  a  pound  of  iron  may  at  a  given  moment 
be  more  directly  useful  to  an  individual,  it  is  always  true  that  a 
pound  of  iron  does  not  satisfy  as  many  or  as  urgent  social 
wants  as  a  pound  of  diamonds.  When  we  speak  of  the  value 
of  iron  or  of  diamonds,  we  refer  to  their  social  utility,  not  to 
their  individual  utility.  Or,  to  put  it  in  another  way,  the  mar- 
ginal utility  of  iron  or  diamonds  to  a  man  living  in  society  is  a 
reflex  of  their  social  utility.  Therefore  iron  is  always  less  valu- 
able than  diamonds,  because  the  social  marginal  utility  of  a  pound 
of  iron  is  always  less  than  the  social  marginal  utility  of  a  pound 
of  diamonds.  Value  in  society  is  the  expression  of  social  mar- 
ginal utility.  Social  economics  deals  only  with  this  kind  of  value. 

75.  Value  in  Exchange. 

Since  value  is  a  social  conception  depending  on  a  compari- 
son of  divers  goods,  and  since  this  comparison  is  ordinarily 
made  in  society  by  their  transfer  from  man  to  man,  it  is  clear 
that  the  value  with  which  economics  has  to  deal  is  exchange 
value,  or  value  in  exchange.  Speaking  roughly,  we  may  say 
that  the  value  of  anything  is  what  it  will  exchange  for.  Speak- 
ing strictly,  we  mean  that  the  value  of  an  article  may  be 
expressed  in  terms  of  any  other  article  for  which  it  will 
exchange. 

Earlier  writers  made  a  distinction  between  value  in  use  and 
value  in  exchange,  but  they  confused  value  in  use  with  total  or 
absolute  utility.  As  soon  as  we  grasp  the  fact  that  the  utility 
with  which  economics  deals  is  marginal  utility,  the  old  distinc- 
tion between  value  in  use  and  value  in  exchange  disappears. 
Other  writers  sometimes  use  the  terms  subjective  and  objec- 
tive value  when  referring  to  individual  and  social  valuation 
respectively.  The  terms  are  awkward,  because  they  obscure 
the  fact  that  at  bottom  value  is  not  an  external  characteristic 
of  a  thing,  but  an  expression  of  its  relation  to  an  individual. 
Value  is  the  result  of  an  estimate  of  a  quality,  not  the  quality 


§  75]  Value  in  Exchange.  183 

itself.  In  this  sense  there  is  no  objective  value.  It  can  be 
called  objective  only  in  the  sense  that  when  society  attaches 
a  value  to  a  commodity  it  is  something  to  which  the  individual 
or  subjective  valuation  must  conform  in  making  an  exchange. 

The  study  of  Robinson  Crusoe  is  important  as  reminding 
us  that  the  foundation  of  value  is  independent  of  exchange. 
Strictly  speaking,  it  is  independent  of  exchange  only  as  be- 
tween man  and  man,  not  as  between  commodity  and  com- 
modity or  between  want  and  want.  Crusoe  exchanges  or 
weighs  off  in  his  mind  apples  and  nuts,  and  thus  gets  an  esti- 
mate for  their  value  to  him.  "Value  in  use"  is  thus  really 
only  one  kind  of  "value  in  exchange,"  although  it  is  a  pe- 
culiar kind  of  exchange.  As  soon,  however,  as  we  deal  not 
with  Crusoe,  but  with  men  in  society,  we  find  that  not  only 
does  the  individual  as  before  measure  one  want  against  an- 
other, but  that  the  satisfaction  of  that  want  depends  upon  the 
estimate  put  by  other  individuals  on  their  respective  wants. 
Value  in  individual  economy  always  presupposes  at  least  two 
things ;  value  in  society  presupposes  in  addition  at  least  two 
men.  In  other  words,  value  in  society  —  that  is,  in  actual 
life  —  is  value  in  exchange ;  and  this  value  in  exchange  is 
nothing  but  the  expression  of  its  true  value  in  use  to  the 
members  of  the  social  group,  that  is,  of  its  marginal  utility. 

Strictly  speaking,  the  value  of  a  thing  exists  only  at  the 
moment  when  it  is  exchanged  for  or  compared  to  something 
else,  just  as  the  utility  of  a  thing  exists  only  at  the  moment 
when  it  satisfies,  or  is  conceived  of  as  satisfying,  a  want. 
Since,  however,  men  learn  by  experience  to  attribute  utility 
to  things  which  can  gratify  a  want,  so  they  attribute  value  to 
things  which  they  know  can  be  exchanged  for  other  things. 
Thus  value  comes  to  mean  exchange  power,  or  the  estimate 
of  exchange  power. 

It  is  accordingly  plain  that  when  we  define  the  value  of  a 
thing  as  the  expression  of  its  social  marginal  utility,  we  mean 
that  value  is  an  expression  of  its  exchange  power;  for  ex- 
change power  is  based  on  the  comparative  estimate  of  direct 


184  Meaning  of  Value.  [§  76 

social  utility,  which  gives  to  every  owner  of  the  commodity  the 
indirect  individual  utility  that  fixes  value  in  society.  As  we 
can  estimate  this  exchange  power  only  by  comparing  one  thing 
with  another,  value  is  sometimes,  but  less  accurately,  spoken 
of  as  a  ratio,  or  a  ratio  of  exchange.  Value  is  indeed  relative, 
but  it  is  not  a  relation  or  a  ratio ;  it  is  an  expression  of  our 
estimate  of  the  relative  exchange  power  of  anything. 

76.  Value  and  Price. 

Since  value  is  an  expression  of  our  estimate  of  relative  ex- 
change or  purchasing  power,  the  value  of  anything  can  be 
ascertained  only  by  comparing  it  with  other  things.  When  we 
measure  a  commodity  in  terms  of  some  one  other  commodity, 
we  speak  of  price.  If  the  value  of  a  cow  is  equal  to  that  of 
five  sheep,  we  say  that  the  price  of  a  cow  is  five  sheep.  In 
civilized  society  we  have  become  accustomed  to  measure  all 
values  in  terms  of  a  single  commodity  called  money ;  so  that 
by  price  we  now  mean  the  money  value  of  anything,  —  the 
amount  of  money  for  which  it  will  exchange. 

Value  and  price  have  thus  come  to  be  interchangeable 
terms.  Sometimes,  however,  value  is  used  in  a  special  sense. 
Thus  we  speak  of  a  thing  as  selling  for  less  than  its  real  value, 
or  of  a  shopkeeper  charging  more  than  it  is  worth,  when  we 
mean  that  the  price  to  others  in  the  long  run  will  be  higher 
or  lower.  So  the  department  stores  advertise  "  great  values  " 
when  they  mean  that  the  goods  are  sold  at  exceptionally  low 
prices  compared  to  the  seller's  estimate  of  their  utility  to  the 
public.  Ordinarily,  however,  when  we  say  a  thing  is  worth 
five  cents,  we  mean  that  the  price  is  five  cents. 

While  the  value  of  anything  is  thus  virtually  equivalent  to  its 
price,  we  must  not  confuse  values  in  general  with  prices  in 
general.  When  we  conceive  of  a  single  commodity,  like 
money,  as  a  standard,  we  consider  it  as  a  fixed  point,  not 
subject  to  fluctuation.1  Prices  hence  may  rise  or  fall  with 

1  As  to  the  difficulties  that  arise  from  fluctuations  in  the  money  stan- 
dard, see,  below,  §  191. 


§77]  Increments  of  Wealth.  185 

reference  to  this  standard.  But  we  cannot  speak  of  a  general 
rise  or  fall  in  values,  because  there  is  no  fixed  point.  Cows 
may  rise  in  value  as  compared  with  sheep,  but  sheep  them- 
selves may  fall  as  compared  with  poultry,  and  poultry  may  vary 
as  compared  with  something  else.  Value  expresses  a  relation ; 
hence,  if  the  value  of  some  articles  diminishes,  it  means  that 
the  value  of  others  must  increase.  But  if  the  price  of  certain 
articles  falls,  it  does  not  follow  that  the  price  of  other  articles 
will  rise.  There  may  be  a  general  rise  or  fall  of  prices,  be- 
cause we  measure  prices  in  one  commodity,  money ;  there 
cannot  be  a  general  rise  or  fall  of  values,  because  money  also 
has  a  value.1 

77.  Value  and  Marginal  Increments  of  "Wealth. 

We  have  thus  far  spoken  of  value  as  the  expression  of 
social  marginal  utility.  To  be  more  exact,  it  should  be  stated 
that  marginal  utility  (and  hence  value)  depends  not  upon  the 
commodity  as  a  whole,  but  upon  the  marginal  increments  of 
wealth  in  the  commodity.  This  might  be  called  Clark's  law, 
from  its  first  formulator,  Professor  John  B.  Clark. 

To  prepare  the  way  for  grasping  this  principle,  we  must  call 
attention  to  several  points.  In  the  first  place,  the  rapidity 
with  which  the  utility  of  successive  increments  of  a  commodity 
diminishes  depends  largely  on  its  combination  with  others. 
One  scarf-pin  is  all  a  man  needs,  the  utility  of  a  second  would 
be  doubtful,  a  tenth  would  be  useless.  But  with  many  cravats, 
we  can  use  more  scarf-pins.  Put  before  the  same  man  a  finely 
cooked  dinner  or  a  loaf  of  bread,  and  not  only  will  he  enjoy 
the  first  more,  but  he  will  be  willing  to  pay.  a  higher  price 
for  the  bread  as  a  part  of  the  dinner. 

Secondly,  in  all  commodities  except  the  simplest  of  a  class 
there  is  always  to  be  found  a  combination  of  various  utilities. 
A  plain  deal  table  suffices  to  hold  books;  one  of  polished 
rosewood  satisfies  a  more  refined  want  and  possesses  an 

1  When  Wall  Street  speaks  of  a  "  general  slump  of  values/'  it  means 
only  a  fall  in  the  prices  of  securities  traded  in  on  the  stock  exchange. 


i86  Meaning  of  Value.  [§77 

additional  utility.  I  may  have  an  ample  supply  of  boots, 
yet  a  new  pair  with  golf  rubbers  in  the  sole  may  be  desired 
for  that  reason  alone.  Each  new  utility  in  an  object  practi- 
cally makes  it  a  new  object.  All  commodities  are  virtually 
made  up  of  such  combinations  or  bundles  of  utilities. 

Thirdly,  the  marginal  increment  of  a  man's  wealth  is  made 
up  of  varying  proportions  of  such  separate  utilities.  Every 
one  purchases  first  necessaries,  then  comforts,  then  luxuries. 
But  what  is  luxury  to  one  man  may  be  almost  necessity  to 
another.  What  is  bought  with  one's  last  dollar  is  the  marginal 
increment  of  enjoyment ;  but  the  more  dollars  we  have,  the  less 
the  utility  of  each.  To  a  man  with  a  very  small  income  the 
final  dollar  may  afford  the  luxury  of  a  few  pints  of  beer ;  to 
the  rich  man  the  dollar  spent  in  beer  is  not  marginal.  His 
marginal  increment  of  wealth  may  take  the  form  of  luxuries 
like  champagne  or  pictures,  but  they  will  generally  consist  of 
particular  attributes  of  commodities.  It  may  be  the  fashion- 
able cut  of  his  garments,  the  last  touch  given  to  the  delicious 
dinner  by  a  cordon  bleu,  the  sumptuousness  of  his  books, 
the  elegance  of  his  carriage,  the  artistic  quality  of  his  china 
or  silverware.  The  garments,  the  dinner,  the  books,  the  car- 
riage, the  china,  —  each  possesses  various  kinds  of  utility ;  but 
what  makes  the  particular  objects  desirable  to  him  is  not  the 
primary,  elementary  utility  in  each,  but  the  final  marginal 
utility. 

Fourthly,  since  each  of  the  separate  utilities  of  an  article 
becomes  at  a  certain  point  marginal  to  different  classes  of 
men,  its  value  depends  not  upon  its  marginal  utility  as  a  whole, 
but  upon  that  of  the  increments  of  utility  each  estimated 
separately.  If  value  were  the  measure  of  marginal  utility  as  a 
whole,  all  but  the  simplest  commodities  would  be  worth  far 
more  than  they  are.  Take,  for  instance,  a  fine  automobile. 
There  are  at  least  five  different  qualities  which  give  it  a  value. 
These  are,  in  the  order  of  importance,  (i)  power  to  afford 
locomotion ;  an  old  two-wheeled  cart  would  do  as  well : 
(2)  freedom  from  jolting  and  protection  from  sun  and  rain; 


§  77]  Increments  of  Wealth.  187 

a  top-buggy  would  do  this :  (3)  size  j  a  plain  coach  would 
possess  this  :  (4)  elegance  of  finish ;  a  fine  equipage  would  have 
this  :  (5)  speed  and  exhilaration ;  only  a  motor  car  will  give  that. 
In  such  a  vehicle  there  would  be,  so  to  speak,  at  the  same  time  a 
cart,  a  buggy,  a  coach,  an  equipage,  a  self-propeller.  The  most 
important  or  primary  utility  is  the  power  to  afford  locomotion. 
Without  this  it  would  be  of  no  use  at  all.  The  next  quality  in 
importance  is  comfort ;  if  it  has  no  springs,  the  vehicle  will  not 
be  used  for  pleasure  driving.  And  so  on  with  the  other  quali- 
ties ;  each  has  a  diminishing  importance.  Yet  the  value  of 
the  vehicle  is  not  the  reflex  of  its  marginal  utility  as  a  whole. 
For  the  primary  quality  of  locomotion  alone  the  rich  man 
would,  if  necessary,  pay  an  immense  sum.  The  mere  fact  of 
riding,  which  might  be  a  luxury  to  a  poor  man,  may  be  a 
necessity  to  him.  The  second  utility  —  comfort  —  would  be 
less  important  than  the  first,  but  might  still  be  prized  im- 
measurably by  him.  And  so  on  with  the  other  qualities.  So 
that,  if  need  be,  he  .would  pay  a  fabulous  amount  for  the 
vehicle. 

As  a  matter  of  fact,  however,  what  he  values  in  the  partic- 
ular automobile  is  the  fifth  or  final  utility,  that  of  self-pro- 
pulsion. He  probably  has  buggies,  coaches  and  equipages 
galore.  The  fourth,  third  and  preceding  utilities  represent 
less  value  because  each  utility  is  marginal  in  turn  to  a  class 
of  smaller  spending  power.  If  automobiles  rose  in  price,  there 
would  be  fewer  of  them,  but  more  equipages,  because  the 
particular  quality  which  differentiates  an  equipage  from  an 
ordinary  coach  would  be  a  marginal  utility  within  the  reach  of 
a  larger  but  less  wealthy  class.  If  equipages  advanced  in 
price,  more  plain  coaches  would  be  built;  if  the  price  of 
coaches  rose,  more  buggies  would  be  built.  In  each  case  the 
vehicle  is  desired  by  a  particular  class  for  a  new  utility,  which 
is  to  that  class  marginal.  Each  successive  class,  however,  is 
poorer  than  its  predecessor,  and  the  gradations  themselves 
become  less.  There  is  more  divergence  between  a  multi- 
millionaire and  a  man  of  moderate  wealth  than  between  the 


1 88  Meaning  of  Value.  [§77 

latter  and  a  man  of  simply  comfortable  means.  Thus  there 
will  be  a  greater  difference  in  price  between  automobiles  and 
equipages  than  between  these  and  coaches,  more  between  a 
coach  and  a  buggy  than  between  a  buggy  and  a  cart.  In  each 
case  the  special  utility  for  which  the  vehicle  is  bought  is  a 
marginal  utility  to  a  poorer  class.  When  a  rich  man  buys  an 
automobile,  he  does  not  pay  the  immense  sum  which  he  would, 
if  necessary,  give  for  the  mere  privilege  of  locomotion.  He 
pays  the  small  price  which  a  poor  man  would  pay  for  a  cart, 
plus  the  somewhat  larger  addition  that  a  slightly  less  poor 
man  would  pay  for  the  difference  between  a  cart  and  a  buggy 
(comfort),  plus  the  still  greater  increment  that  a  man  of 
moderate  means  would  pay  for  the  difference  between  a  buggy 
and  a  coach  (size),  plus  the  yet  larger  increment  that  a  fairly 
wealthy  man  would  pay  for  the  difference  between  a  coach 
and  an  equipage  (elegance),  plus  the  final  and  largest  incre- 
ment that  he  and  his  class  are  willing  to  give  for  the  marginal 
utility  to  them  of  the  automatic  attachment.  All  these 
increments  added  together  are  far  less  than  what  he  would, 
if  necessary,  pay  for  the  privilege  of  locomotion,  —  the  cart 
element  in  the  automobile. 

When,  therefore,  we  say  that  value  or  purchasing  power  is 
the  expression  of  social  marginal  utility,  it  is  clear  that  what 
we  mean  is  that  value  is  the  expression  of  the  social  marginal 
increments  of  utility  which  are  bundled  together  or  united  in 
anything,  and  each  of  which  is  marginal  to  a  different  class. 


CHAPTER   XIII. 
THE   MEASURE   OF  VALUE. 

78.  References. 

W.  Smart,  Introduction  to  the  Theory  of  Value  (1891),  chs.  ix-xiv;  J.  B. 
Clark,  Philosophy  of  Wealth  (1886),  ch.  xxiv ;  A.  Marshall,  Principles 
(1898),  bk.  v,  ch.  xiv;  N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  i, 
§4;  W.  S.  Jevons,  Theory  (1888),  ch.  iv  ;  E.  v.  Bohm-Bawerk,  Positive 
Theory  of  Capital  (1891),  bk.  iii,  ch.  x ;  F.  v.  Wieser,  Natural  Value 
(1903),  bk.  v;  A.  W.  Flux,  Economic  Principles  (1904),  ch.  iv ;  C.  M. 
Walsh,  'Measurement  of  Exchange  Value  (1901),  ch.  i ;  J.  A.  Hobson, 
Economics  of  Distribution  (1900),  ch.  ii  ;  S.  N.  Patten,  Dynamic  Economics 
(1892),  chs.  ix,  x;  D.  I.  Green,  Pain  Cost  and  Opportunity  Cost  (Quart. 
Jour.  Econ.,  VIII,  1895);  A.  C.  Whitaker,  History  and  Criticism  of  the 
Labor  Theory  of  Value  in  English  Political  Economy  (Columbia  Series, 
XIX,  1904). 

79.  Meaning  of  Cost. 

Value,  as  we  have  seen,  has  a  meaning  only  when  attached 
to  a  definite  quantity  of  an  article.  The  value  of  iron  means 
nothing;  the  value  of  a  ton  of  iron  means  something.  In 
order  to  ascertain  why  anything  has  value,  we  must  therefore 
inquire  not  only  why  we  attach  any  importance  to  it  as  com- 
pared with  other  things  in  general,  but  also  why  a  definite 
quantity  of  that  article  satisfies  more  or  less  of  our  wants  than 
an  equal  quantity  of  something  else.  We  must  regard  not 
only  our  desire  in  the  abstract,  but  our  desire  for  a  particu- 
lar amount.  That  is,  in  analyzing  value  we  must  take  into 
consideration  not  only  the  demand,  but  the  supply ;  for  the 
effective  demand  for  an  article  which  lies  at  the  root  of 
value  is  itself  influenced  by  the  supply.  Of  two  equally  useful 
articles  we  shall  be  more  concerned  in  securing  the  one  the 

189 


190  Measure  of  Value.  [§  79 

supply  of  which  is  limited  than  the  one  the  supply  of  which  is 
abundant. 

What  regulates  supply?  In  the  last  resort  it  is  the  forces  of 
nature  as  utilized  by  the  energy  of  man.  In  some  cases  nature 
gives  so  abundantly  that  man  need  do  nothing;  in  other 
cases  nature  is  so  niggardly  that  his  utmost  effort  fails  to 
augment  the  scanty  stock.  Between  these  two  extremes  lie 
the  great  mass  of  commodities  the  supply  of  which  can  be 
increased  through  human  action.  The  more  readily  nature 
discloses  her  secrets  to  man,  the  less  is  the  difficulty  of  secur- 
ing a  supply.  The  greater  the  stubbornness  of  nature,  the  more 
determined  do  our  efforts  become.  It  is  in  this  sense  that 
value  may  be  considered  to  be  the  measure  of  the  difficulty  of 
attainment,  —  that  is,  of  the  cost  involved  in  securing  a  supply. 
Value,  then,  would  be  the  expression  of  costliness. 

What,  more  precisely,  is  cost?  The  word  is  used  in  a 
variety  of  senses.  To  the  consumer  cost  means  price ;  if  a  thing 
costs  a  dollar,  he  means  that  the  price  is  a  dollar.  To  the 
employer  cost  means  total  cash  outlay  expended  in  production. 
Here  the  cost  usually  is  less  than  the  price,  the  difference 
between  cost  and  price  being  the  profit :  a  machine  may  cost 
the  builder  ten  dollars;  he  may  sell  it  for  twelve.  To  the 
workman  cost  means  irksomeness  of  labor ;  the  harder  the 
work,  the  more  does  his  labor  "  cost "  him.  Underlying  all 
these  meanings  is  the  idea  of  sacrifice,  the  giving  up  of  some- 
thing in  return  for  the  object  to  be  attained.  All  sacrifice 
involves  a  pain,  —  a  pain  of  doing  something  distasteful  or 
of  refraining  from  doing  something  pleasurable.  The  one  is 
present  physical  sacrifice,  the  other  present  mental  sacrifice 
depending  upon  a  future  physical  sacrifice. 

Just  as  the  word  utility  brings  to  our  mind  the  pleasure 
we  get  from  a  thing,  so  the  term  disutility  is  used  to  signify 
its  ability  to  inflict  pain.  We  know  that  the  marginal  utility 
of  a  commodity  diminishes  with  the  increase  of  the  amount 
at  our  disposal,  and  under  certain  conditions  shrinks  to  zero. 
We  have  so  much  of  it  that  it  becomes  indifferent  to  us.  It 


§  79]  Meaning  of  Cost.  191 

possesses  what  Jevons  calls  "inutility,"  that  is,  no  (marginal) 
utility.  Its  value,  as  in  the  ordinary  case  of  air  arid  water,  is 
nothing.  Under  other  conditions  of  supply  a  commodity  which 
usually  possesses  utility  may  actually  inflict  a  pain.1  Wood  ordi- 
narily satisfies  a  want ;  but  when  the  prospective  farmer  tries  to 
make  a  clearing,  the  wood  is  something  to  be  got  rid  of.  Its 
presence  is  a  discomfort.  It  possesses  not  a  positive,  but  a 
negative,  utility.  It  has  gone  through  the  stages  of  utility  and 
inutility,  and  has  reached  that  of  disutility.  Instead  of  being 
a  commodity  it  might  now  be  called  a  "  discommodity."  So, 
in  the  same  way,  water  in  parts  of  England  is  something  to 
be  removed  by  draining  the  fens;  water  in  arid  America  is 
so  necessary  for  irrigation  purposes  that  it  attains  a  high 
value. 

Not  only  things  external  to  a  man  run  through  this  scale 
from  utility  to  disutility.  Physical  activity  itself  is  subject  to 
the  same  law.  When  a  man  begins  to  work,  the  exercise  of 
his  muscles  is  a  pleasure.  A  certain  amount  of  it  is  even  a 
necessity.  With  the  increase  in  the  amount  beyond  a  certain 
point,  the  pleasure  diminishes,  until  further  activity  becomes  a 
matter  of  indifference.  A  still  further  increase  means  dis- 
comfort, until,  finally,  any  more  work  involves  positive  agony. 
Labor  or  toil,  therefore,  means  painful  exertion.  But  just  as 
the  same  commodity  may,  according  to  circumstances,  possess 
utility  or  disutility,  so  the  same  activity  may  or  may  not  in- 
volve toil.  Singing  is  generally  a  pleasure  ;  to  the  chorus  girl 
it  is  toil.  Golf  playing  is  a  diversion ;  to  the  golf  teacher  it  is 
labor. 

Cost,  therefore,  is  at  bottom  equivalent  to  pain.  We  un- 
dergo pain  in  order  to  secure  utility  or  to  remove  disutility. 
Cost  is  always  the  antithesis  of  remuneration.  We  give  up 
something  in  order  to  get  something  in  return.  The  ordinary 
man  tries  to  secure  the  greatest  result  with  the  least  effort. 
He  will  toil  only  up  to  that  point  where  the  cost,  or  pain, 

1  Some  commodities  which  seem  to  give  us  pain  really  afford  a  surplus 
of  pleasure.  A  distasteful  medicine  is  none  the  less  prized  by  us. 


192  Measure'  of  Value.  [§  80 

begins  to  exceed  the  pleasure  of  what  he  gets  in  return. 
There  are  grades  in  disutility  or  pain,  just  as  there  are  grades 
in  utility  or  pleasure.  As  the  marginal  utility  of  a  commodity 
depends  on  the  supply,  so  the  marginal  disutility  or  pain  of 
labor  depends  on  the  amount.  The  more  fish  I  have,  the  less 
the  utility  of  each  ;  the  more  hours  I  must  work  to  catch  them, 
the  greater  the  disutility  of  each  hour's  work.  Up  to  a  certain 
point  the  pain  of  the  work  does  not  equal  or  exceed  the 
pleasure  I  get  from  the  fish.  Beyond  that  point  I  shall  not 
work,  because  the  result  will  be  a  surplus  of  pain.  At  that 
marginal  point  the  utility  of  the  fish  equals  the  pain  or  cost  of 
the  labor.  There  will  be  a  balance  between  the  pleasure  and 
the  pain ;  or,  in  other  words,  the  pleasure  and  the  pain  will  be 
in  equilibrium.  In  the  case  of  the  individual  economy  —  that 
is,  of  man  living  apart  from  society  —  the  marginal  degrees  of 
utility  and  of  pain,  or  cost,  therefore  tend  to  be  equal. 
Marginal  cost  equals  marginal  utility.  The  value  of  the  fish 
may  be  estimated  in  either  the  one  or  the  other. 

80.  Individual  and  Social  Cost. 

In  dealing  with  the  problems  of  actual  life,  however,  we 
treat  not  of  a  Crusoe  living  on  fish,  but  of  men  living  in  soci- 
ety and  making  exchanges  with  each  other.  The  individual 
economy  is  profoundly  modified  by  the  social  economy.  This 
is  the  point  that  has  often  been  overlooked.  Our  study  is 
social  economics. 

We  have  seen  that  the  marginal  utility  to  an  individual  is, 
in  effect,  a  reflex  of  the  social  marginal  utility.  In  the  same 
way  the  marginal  "  disutility  "  to  an  individual  may  be  con- 
verted through  social  causes  into  a  utility.  What  gives  one 
man  pleasure  may  give  another  pain.  I  may  enjoy  a  horse  ;  but 
if  you  do  not  ride  or  drive,  the  horse  will  put  you  to  the  use- 
less expense  of  keeping  him.  Yet,  since  there  is  a  social  de- 
mand for  horses,  you  can  get  rid  of  him  to  advantage ;  and 
you  will  therefore  not  give  him  away,  but  keep  him  until  you 
can  sell  him  with  profit.  Although  the  horse  had  a  positive 


§  So]          Individual  and  Social  Cost.  193 

disutility  for  you,  he  now  acquires  an  indirect  utility  because 
of  social  reasons.  So  if  the  farmer,  mentioned  above,  who 
wanted  to  make  a  clearing,  lived  by  chance  near  a  large  com- 
munity, he  would  not  burn  the  wood,  but  sell  it,  because  it 
would  now  have  a  social  utility.  Its  disutility  to  him  would  be 
converted  into  a  utility.  It  is  only  when  anything  produces 
a  surplus  of  pain  to  the  community  as  a  whole  —  as  a  plague 
of  grasshoppers,  or  an  inundation,  or  the  sewage  of  a  city 
of  "which  there  is  no  intelligent  disposition  —  that  it  possesses 
social  disutility.  In  such  a  case  it  can  have  no  indirect  utility 
for  the  individual. 

Since  cost  is  a  form  of  disutility,  it  follows  that  the  real  cost 
of  importance  in  affecting  value  is  social  cost,  not  individual 
cost.  We  stated  above  that  value  is  the  measure  of  sacrifice. 
In  what  sense,  however,  is  value  the  measure  of  sacrifice? 
Evidently,  not  of  individual  sacrifice.  A  street-sweeper  may 
work  harder  than  a  skilled  factory  hand,  and  yet  the  value  of 
his  services  will  be  less.  Value  is  a  social  conception  ;  society 
puts  its  appraisal  upon  commodities.  If  value  is  a  measure  of 
sacrifice  and  if  value  is  a  social  estimate,  value  must  be  the 
measure  of  social  sacrifice  or  cost.  Social  sacrifice  means  the 
sacrifice  which  members  of  society  as  a  whole  are  willing  to 
make.  The  exertion  of  one  man  is  estimated  in  relation  to 
the  exertion  of  another,  and  the  sacrifice  of  each  is  compared 
with  the  needs  of  society  as  a  whole.  The  standard  is  social, 
not  individual.  It  is  far  easier  to  be  a  street-sweeper  than  a 
skilled  factory  hand.  Society  is  more  willing  to  spare  the 
former  than  the  latter;  for,  to  replace  the  one,  society  must 
give  up  more  of  its  energy  than  to  replace  the  other.  Con- 
sequently, although  the  street-sweeper  may  work  the  harder, 
the  sacrifice  or  cost  to  society  is  less  than  in  the  case  of  the 
factory  hand.  The  latter  saves  society  more  effort.  When 
one  commodity  is  exchanged  for  another,  or  when  both  cost 
the  same,  it  means  that  the  additional  sacrifice  that  would  be 
imposed  upon  society  to  replace  either  of  them  is  the  same. 
The  marginal  social  cost  is  identical. 

13 


1 94  Measure  of  Value.  [§  81 

81.  Cost  and  Surplus. 

Since  economic  activity  consists  in  securing  as  much  enjoy- 
ment as  possible  with  the  least  effort  or  cost,  it  follows  that 
under  conditions  of  progress  the  individual  will  endeavor  to 
secure  a  surplus  utility.  If  game  is  plentiful  in  one  section 
and  so  scarce  in  another  that  the  hunter  must  work  to  the 
point  of  exhaustion,  his  needs  will  be  satisfied  by  far  less  ex- 
ertion in  the  first  case  than  in  the  second.  The  extra  utility 
which  he  enjoys  is  called  residual  utility,  or  surplus  utility,  or,  in 
short,  surplus.  Looked  at  from  the  point  of  view  of  produc- 
tion, it  is  a  producer's  surplus  :  the  labor  of  hunting  is  the 
cost  of  securing  or  producing  the  game.  From  the  point  of 
view  of  consumption,  it  is  a  consumer's  surplus :  the  pleasure 
of  eating  the  game  is  its  utility.  The  excess  of  the  utility 
over  the  cost  is  the  surplus.  Whether  we  call  it  consumer's 
surplus  or  producer's  surplus  is  immaterial. 

The  conception  of  surplus,  however,  is  sometimes  used  in  a 
second  way.  In  the  case  of  the  surplus  just  referred  to  we 
compare  enjoyment  with  exertions,  and  we  call  it  either  pro- 
ducer's or  consumer's  surplus  according  as  we  look  at  it  from 
the  point  of  view  of  cost  or  of  enjoyment.  This  conception 
of  surplus  is  universal :  it  applies  to  every  man  who  is  at  once 
a  producer  and  a  consumer,  to  the  man  living  in  society  as 
well  as  to  the  solitary  huntsman.  The  term  "  surplus  "  may, 
however,  be  used  in  another  sense,  which  leaves  out  of  account 
the  idea  of  exertion,  and  which  regards  every  man  only  as  a 
consumer.  It  assumes  that  there  has  been  no  cost  of  acquir- 
ing the  articles,  or  that  the  subjective  cost  or  toil  of  acquisition 
is  precisely  the  same  to  all.  Here  the  surplus  satisfaction  that 
an  individual  secures  is  entirely  a  consumer's  surplus,1  depend- 
ing on  the  relative  urgency  of  his  different  wants.  If  I  agree 
to  give  up  a  book  for  my  neighbor's  knife,  I  do  so  because 
I  expect  his  knife  to  afford  me  more  satisfaction  than  my 

1  The  term  "  consumer's  rent,"  first  suggested  by  Marshall,  is  not  so 
good  because  of  the  equivocal  meaning  of  "  rent." 


§  8i]  Cost  and  Surplus.  195 

book.  The  utility  to  me  of  the  knife  is  greater  than  the  pain 
of  parting  with  the  book.  As  a  consumer,  I  consider  the 
pain  of  parting  with  the  book  as  the  exact  equivalent  of 
the  utility  I  lose ;  but  since  the  utility  to  be  afforded  to  me 
by  the  knife  is  greater  than  the  utility  I  lose  through  the  book, 
there  will  be  a  balance  to  my  credit.  As  a  consumer,  I  expect 
a  surplus  enjoyment. 

This  specific  consumer's  surplus,  however,  is  of  no  prac- 
tical significance.  For  in  actual  life  we  cannot  enjoy  anything 
without  procuring  it,  —  that  is,  without  its  costing  us  something. 
But  just  as  enjoyments  or  utilities  differ  from  individual  to 
individual,  so  do  costs  or  sacrifices  differ.  Both  the  knives 
and  the  books  can  be  obtained  only  on  the  condition  of  some 
exertion.  The  cost,  or  pain,  of  parting  with  the  book  depends 
on  the  cost,  or  pain,  of  acquiring  the  knife.  Hence  the  only 
real  surplus  which  is  of  importance  is  the  surplus  of  enjoyment 
over  cost,  whether  we  call  it  producer's  surplus  or  consumer's 
surplus.  If  we  take  the  possession  of  knives  or  books  for 
granted,  we  can  indeed  speak  of  consumer's  surplus ;  but  if 
we  reflect  that  knives  and  books  must  be  procured  before  they 
can  be  parted  with,  the  surplus  becomes  a  real  surplus,  which 
can  equally  well  be  called  a  producer's  surplus.  It  is  a  sur- 
plus of  utility  over  cost. 

Individual  surplus,  however,  is  essentially  subjective,  and 
never  affects  prices.  For  value  is  a  social  conception.  This 
statement  is  true  of  surplus  in  general,  as  well  as  of  the  abstract 
consumer's  surplus  just  referred  to.  I  secure  a  surplus  utility 
from  my  comrade's  knife,  but  he  secures  a  surplus  utility  from 
my  book.  He  would  otherwise  not  have  given  up  the  knife. 
The  exchange  is  therefore  mutually  beneficial.  The  old  belief 
that  what  one  man  (or  one  country)  gains  in  an  exchange 
another  necessarily  loses,  is  incorrect.  Each  may  get  a  surplus 
utility.  But  while  there  is  a  surplus  utility  to  each,  the  value 
does  not  necessarily  change.  The  value  of  the  book  and  the 
value  of  the  knife  remain  the  same.  The  marginal  utility  of  one 
book  would  still  be  equal  to  that  of  one  knife.  If  for  some  reason 


196 


Measure  of  Value.  [§  81 


the  book-owners  found  that  knives  were  twice  as  useful  to  them 
as  before,  and  if  for  a  similar  reason  the  knife-owners  thought 
that  books  were  twice  as  useful  to  them  as  before,  the  surplus 
utility  of  the  exchange  to  each  owner  would  be  double  what  it 
was  before ;  but  the  book  would  still  exchange  for  the  knife  : 
their  value  would  be  unaltered.  Value  may  thus  remain  the 
same,  even  when  the  benefits  of  exchange  to  both  parties 
grow.  The  more  varied  the  wants  of  a  community,  the  greater 
the  benefits  of  exchange. 

On  the  other  hand,  values  may  change  and  the  surplus 
utility  remain  the  same.  If  the  book-owners  prized  knives 
twice  as  much  as  before,  while  the  importance  of  books  to 
knife-owners  was  unaltered,  this  very  fact  would  increase  the 
aggregate  social  demand  for  knives,  and  therefore  the  sacrifice 
that  the  book-owners  must  make  to  get  a  knife.  The  knife- 
owners  would  make  the  book-owners  give  two  books  for  a 
knife.  The  price  of  books  would  fall,  and  that  of  knives  rise. 
The  marginal  utility  of  one  knife  would  equal  the  marginal 
utility  of  two  books.  The  surplus  utility  to  the  book-owners 
would  remain  the  same,  because,  although  the  utility  would 
increase,  the  cost  would  increase  in  the  same  proportion.  In 
every  exchange  the  cost,  or  sacrifice,  depends  on  the  reciprocal 
demand  for  the  commodities. 

The  surplus  utility  that  any  one  individual  gets  from  an  eco- 
nomic action,  therefore,  has  no  influence  on  value,  however 
much  it  may  affect  his  own  happiness.  It  is  a  result,  not  a 
cause.  Surplus  is  the  excess  of  total  utility  over  total  cost. 
Value  is  an  expression  of  marginal  utility  or  marginal  cost. 
Surplus  in  the  case  of  any  one  person  is  the  result  of  an  indi- 
vidual subjective  estimate  which  differs  from  man  to  man ; 
value  is  the  result  of  a  social  estimate  in  which  the  individual 
preferences  lose  their  significance. 

We  must  therefore  be  careful  to  interpret  correctly  the 
statement  above,  that  marginal  utility  equals  marginal  disutil- 
ity, or  cost.  In  an  isolated  economy,  where  there  is  only 
one  person  battling  with  nature,  this  tends  to  be  true  of  the 


§  8i]  Cost  and  Surplus.  197 

individual.  In  society,  on  the  other  hand,  whatever  the  rate  of 
exchange,  it  is  only  the  social  utility  and  social  cost  of  which 
the  marginal  degrees  are  equal.  If  a  knife  exchanges  for  a 
book,  it  is  because  the  demand  in  the  community  as  a  whole 
is  such  that  the  marginal  sacrifice  to  society  of  parting  with  a 
book  tends  to  equal  the  marginal  pleasure  of  society  in  getting 
a  knife.  To  put  it  more  accurately,  a  knife  will  exchange  for 
a  book  only  because  the  sacrifice  to  society  in  making  the 
knife,  for  which  it  receives  in  turn  the  pleasure  of  books,  tends 
to  equal  the  sacrifice  of  making  the  book,  for  which  it  receives 
in  return  the  pleasure  of  knives.  To  any  individual  the  sacri- 
fice may  be  less  than  the  pleasure,  but  there  will  always  be  a 
marginal  individual  to  whom  pleasure  and  sacrifice  are  equal. 
The  marginal  pleasure  in  the  aggregate  tends  to  equal  the 
marginal  pain  in  the  aggregate.  The  balance  or  equilibrium 
is  between  the  pains  and  the  pleasures  of  the  sum  of  individuals. 
Where  an  exchange  economy  exists,  the  real  equilibrium  is  a 
social  equilibrium. 

This  shows  clearly  that  the  real  cost  to  any  member  of 
society  which  influences  value  is  not  the  subjective  cost  to  him. 
The  sacrifice  imposed  upon  society  to  secure  anything  is,  as 
we  have  seen,  the  exertion  needed  to  replace  it.  To  replace 
an  article,  however,  from  the  social  point  of  view,  is  to  produce 
it.  For,  although  an  individual  may  replace  an  article  by  pur- 
chasing it  from  the  producer,  society  as  a  whole  can  replace 
an  article  only  by  producing  it.  Thus,  when  we  speak  of 
social  cost,  we  really  mean  cost  of  production ;  and  when  we 
say  that  value  is  influenced  by  cost,  we  mean  that  value  is  influ- 
enced by  cost  of  production.  What  may  be  to  the  individual 
a  subjective  cost  becomes,  when  translated  into  terms  of 
society  —  that  is,  of  value  —  an  objective  cost  to  him.  We 
think  no  longer  of  the  sacrifice  imposed  upon  any  one  indi- 
vidual, but  only  of  the  social  sacrifice,  or  cost,  embodied 
in  the  commodity;  or,  rather,  the  sacrifice,  or  cost,  to  the 
individual  is  the  result  and  reflex  of  the  sacrifice  to  the  com- 
munity. Just  as  we  saw  above  that  the  individual  utility  which 


198  Measure  of  Value.  [§  82 

affects  value  is  the  reflex  of  the  social  utility,  so  the  individual 
cost  which  affects  value  is,  as  we  shall  see  more  fully  in  a 
moment,  the  reflex  of  the  social  cost.  If  an  individual  desires 
to  sell  a  commodity,  he  will  normally  get  for  it  not  what  he 
chooses,  but  what  society  as  a  whole  fixes  as  the  proper  figure. 
He  may  personally  be  able  to  raise  a  particular  horse  for  less 
than  a  particular  cow ;  but  that  will  not  enable  him  to  sell  a 
cow  for  more  than  the  usual  price  of  a  horse.  His  own  indi- 
vidual estimate  is  of  importance  only  as  affecting  the  aggre- 
gate social  estimate.  Every  individual  gauges  his  economic 
well-being  from  the  point  of  view  of  surplus,  —  of  getting  as 
much  satisfaction  as  possible  above  the  cost ;  but  the  cost,  or 
sacrifice,  which  he  must  incur  is  fixed  not  by  himself,  but  by 
society  as  a  whole.  A  farmer  will  not  permanently  raise  cows 
if  his  cost  exceeds  the  social  level  as  reflected  in  the  price. 

82.   Cost  and  Utility. 

The  failure  to  realize  that  value  is  a  social  conception  has 
led  to  much  pointless  controversy.  Thus  Ricardo  and  his 
followers  maintain  that  the  value  of  a  commodity  is  fixed  by 
its  cost  of  production ;  while  Jevons  and  those  that  agree  with 
him  contend  that  value  is  fixed  by  its  marginal  utility.  Both 
are  right,  but  neither  is  right  in  the  sense  in  which  he  under- 
stood the  terms.  Cost  of  production  is  the  measure  of  value ; 
but  it  is  not,  as  Ricardo  thought,  individual  cost.  Marginal 
utility  determines  value  ;  but  it  is  not,  as  Jevons  thought,  indi- 
vidual utility.  Both  cost  and  utility  measure  value,  because, 
as  we  have  seen,  marginal  social  cost  is  always  equal  to  mar- 
ginal social  utility.  In  the  way  they  frame  the  statement,  the 
followers  of  both  Ricardo  and  Jevons  are  correct  in  denying 
the  others'  statement,  and  yet  err  in  their  own.  Rightly  inter- 
preted, they  are  correct  in  their  own  statement,  and  yet  err 
in  denying  the  truth  of  the  others'.  Let  us  make  this  clear. 

Utility,  as  we  know,  is  the  fundamental  quality  of  everything 
used  by  man.  But  utility  is  not  sufficient  to  give  value.  For 
anything  to  have  value  its  supply  must  be  limited.  The  utility 


§  82]  Cost  and  Utility.  1 99 

which  gives  it  value  is  the  marginal  utility.  If  the  supply  is 
unlimited,  the  marginal  utility  is  zero.  Positive  marginal  utility, 
therefore,  depends  upon  limitation  of  supply.  But  if  the  sup- 
ply is  limited,  it  will  cost  some  sacrifice  to  secure  or  to  repro- 
duce it.  Therefore,  when  we  measure  the  marginal  utility  of  a 
commodity,  we  measure  the  cost  of  securing  it.  Hence  either 
utility  or  cost  may  be  declared  the  measure  of  value.  Thus, 
while  marginal  utility  is  the  fundamental  cause  of  value  in  the 
sense  that  nothing  could  have  any  value  if  it  had  no  utility, 
cost  may  be  declared  to  be  not  indeed  the  cause,  but  an 
equally  good  measure,  of  value.  Regarded  from  this  point  of 
view,  the  discussion  as  to  which  is  the  real  measure  of  value  is 
as  futile  as  to  ask  how  to  measure  the  sound  or  quality  of  a 
hammer's  blow  on  a  bell.  Without  that  particular  kind  of  bell 
there  would  be  a  different  quality  of  sound ;  without  that  par- 
ticular kind  of  hammer  there  would  likewise  be  a  different 
quality  of  sound.  So  in  economic  life  we  deal  with  the  de- 
mand for  anything  as  compared  with  its  supply.  When  we 
speak  of  utility,  we  think  of  the  person  who  wants  it,  —  that  is, 
of  the  demand.  W7hen  we  speak  of  cost,  we  think  of  the  per- 
son who  parts  with  it,  —  that  is,  of  the  supply.  But  these 
interact  mutually;  for  the  demand,  although  reflecting  the 
utility,  would  change  if  the  cost  were  different ;  and  the  supply, 
although  conditioned  by  the  cost,  would  change  if  the  utility 
were  altered.  To  affirm  that  either  utility  or  cost  exclusively 
measures  value  is  as  incomplete  as  to  say  that  either  demand 
or  supply  exclusively  fixes  value.  Value  is  the  expression  of 
the  relation  between  demand  and  supply.  We  cannot  speak 
of  marginal  utility  without  implying  cost ;  we  cannot  speak  of 
marginal  cost  without  implying  utility. 

All  this  is  true,  however,  as  we  have  seen,  only  of  social 
cost  and  of  social  utility.  The  utility  of  anything  to  an  indi- 
vidual figures  in  the  determination  of  value  only  to  the  extent 
(in  most  cases  infinitesimal)  that  the  individual  choice  goes 
to  determine  or  change  the  choice  of  the  community.  If  I 
have  a  potato  field  at  home,  that  will  not  obviate  the  necessity 


200  Measure  of  Value.  [§  82 

of  my  paying  the  market  price  for  potatoes.  If  I  am  directed 
by  my  physician  to  live  on  potatoes  exclusively,  that  will  not 
lead  the  dealer  to  charge  more  than  the  market  price.  The 
demand  that  tells  is  the  aggregate  social  demand,  depending 
on  the  social  utility. 

Conversely,  the  cost  that  influences  value  is  not  the  cost  of 
production  of  that  particular  commodity  to  the  individual  pro- 
ducer. It  may  take  me  two  days  to  make  with  old  tools  a 
table  which  fully  equipped  carpenters  can  turn  out  in  a  few 
hours.  I  can  get  for  my  table  no  more  than  the  carpenters 
for  theirs.  The  carpenters  can  get  this  price  for  their  table, 
not  because  it  has  cost  them  so  much  work,  but  because  they 
save  the  members  of  society  as  a  whole  the  sacrifice,  or  cost, 
of  making  the  table  for  themselves.  If  there  were  no  carpen- 
ter, society  would  have  to  set  to  work,  abandon  some  of  the 
things  it  does  now,  and  give  up  some  of  its  time  to  make 
tables.  Instead  of  each  member  of  society  devoting  a  part  of 
his  day  to  making  a  part  of  a  table,  society  as  a  whole  sets 
aside  a  certain  class  to  make  nothing  but  tables.  But  what 
society  is  willing  to  pay  for  the  table  is  always  the  marginal 
cost  to  it,  and  this  marginal  cost  is  the  final  sacrifice  which 
society  is  willing  to  incur  for  tables  as  compared  with  other 
things.  What  the  carpenter  can  get  for  the  table  will  adjust 
itself  to  this  amount  of  social  sacrifice,  and  thus  the  value  of  a 
commodity  gets  to  be  the  equivalent  of  the  (individual)  cost 
of  producing  it.  We  may  thus  roughly  say  that  individual 
labor  or  cost  of  production  fixes  value ;  but  what  it  really  does 
is  not  to  fix  value,  but  to  express  the  value  that  is  fixed  by 
social  forces  as  a  whole.  The  value  is  due  not  to  the  labor  of 
the  individual  who  has  made  it,  but  to  the  social  service  which 
it  is  going  to  render,  —  that  is,  to  the  social  sacrifice  which  it 
is  going  to  save.  If  it  does  not  render  that  service,  it  will  not 
possess  that  value,  no  matter  how  much  individual  labor  has 
been  spent  on  it.  On  the  other  hand,  if  less  individual  labor 
be  spent  on  it,  it  will  have  less  value,  not  because  less  indi- 
vidual labor  has  been  spent,  but  because  the  marginal  sacrifice 


§  83]  Surplus  and  Progress.  201 

of  society  is  now  less.     Utility,  and  not  cost,  is  the  ultimate 
cause  of  value. 

We  see,  then,  that  value  may  be  defined  either  as  the  ex- 
pression of  marginal  social  utility  or  as  the  expression  of  the 
marginal  social  sacrifice  incurred  to  secure  utility.  Value  may 
be  estimated  in  terms  of  either  social  utility  or  social  cost,  be- 
cause the  marginal  degree  of  the  one  is  equal  to  that  of  the 
other.  Individual  cost,  however,  affects  value  only  in  the  sense 
that  it  adjusts  itself  to  the  social  utility,  which  is  the  supreme 
test.  Utility  is  the  positive  factor,  cost  is  a  result.  The  exact 
relation  of  individual  cost  of  production  to  value,  however, 
still  remains  to  be  studied,  and  will  be  discussed  later. 

83.    Social  Surplus  and  Progress. 

Since  all  progress  consists  in  getting  more  results  with  less 
efforts,  the  problem  of  social  cost  and  social  surplus  becomes 
one  of  basic  importance.  All  surplus  or  residual  utility  is  the 
balance  of  satisfaction  over  sacrifice.  It  may  therefore  be 
augmented  in  two  ways :  the  sacrifice  may  remain  the  same, 
while  the  satisfaction  increases ;  or  the  satisfaction  may  remain 
the  same,  while  the  sacrifice  decreases.  In  the  one  case  we 
deal  with  problems  of  consumption,  in  the  other  with  problems 
of  production.  In  the  one  case  we  approach  the  subject  from 
the  point  of  view  of  utility,  in  the  other  from  that  of  cost. 

The  social  surplus  may  be  enlarged  by  changes  in  consump- 
tion. The  sacrifice  incurred  by  the  individuals  that  compose 
society  may  remain  the  same,  and  yet  they  may  use  so  much  in- 
telligence in  the  rearrangement  of  their  choices  of  satisfaction 
that  they  may  procure  a  greater  net  result.  It  need  not  cost 
more  effort  to  cook  a  good  dinner  than  an  unpalatable  one, 
and  yet  the  surplus  of  satisfaction  over  sacrifice  is  greater. 
When  the  social  choices  are  improved  on  a  large  scale,  there 
will  be  a  great  increase  in  the  social  surplus. 

While  it  is  possible  to  have  in  this  way  a  larger  satisfaction 
with  the  same  effort,  it  happens  just  as  frequently,  however, 
that  we  can  procure  the  same  satisfaction  with  a  smaller  effort. 


202  Measure  of  Value.  [§  83 

The  emphasis  is  here  laid  not  upon  consumption,  but  upon 
production.  Whatever  diminishes  the  cost  of  production  en- 
larges to  that  extent  the  surplus  of  society.  If  the  dinner 
which  originally  cost  one  dollar  can  now  be  supplied  for  fifty 
cents,  we  shall  have  to  work  less  to  get  that  dinner ;  or  if  we 
work  as  hard,  we  shall  have  the  remaining  half-dollar  to  spend 
on  something  new.  All  civilization  depends  on  the  increase  of 
our  wants.  In  most  cases,  however,  the  appearance  of  a  new 
want  requires  additional  effort  on  the  part  of  individuals  for 
its  satisfaction.  If  the  additional  sacrifice  keeps  pace  with  the 
additional  want,  we  are  no  better  off  than  before,  —  there  is 
no  increase  of  the  social  surplus.  But  as  soon  as  we  can  satisfy 
the  old  want  with  a  smaller  total  effort,  the  surplus  is  increased 
because  some  of  the  efforts  previously  devoted  to  the  satisfac- 
tion of  the  old  want  are  now  set  free  for  the  attainment  of  the 
new  object.  With  the  same  output  of  energy  we  receive  greater 
results.  l5iminution  of  social  cost  is  the  great  creator  of  social 
surplus. . 

While  changes  in  consumption  are  of  significance  in  them- 
selves, they  become  of  great  importance  chiefly  as  engendering 
changes  in  production.  Whether  we  call  the  social  surplus, 
however,  a  consumer's  surplus  or  a  producer's  surplus,  is,  as 
we  know,  immaterial.  It  is  equally  immaterial  whether  we  say 
that  the  progress  is  due  to  lower  cost  or  to  greater  utility.  So- 
cial surplus  is  the  result  of  man's  struggle  with  nature.  It  is 
the  margin  between  result  and  effort.  The  way  to  increase  the 
surplus  is  to  maximize  the  results  and  to  minimize  the  efforts,  — 
that  is,  to  increase  utilities  and  to  decrease  costs. 

The  mere  increase  of  the  social  surplus  is,  however,  not  all 
that  is  necessary  to  progress.  Without  such  a  surplus,  indeed, 
there  can  be  no  highly  developed  civilization ;  for  where  the 
energy  of  society  is  entirely  occupied  with  procuring  the  bare 
means  of  subsistence,  there  can  be  no  opportunity  for  the 
higher  life.  A  frontier  community  differs  from  a  developed 
one  chiefly  in  the  fact  that  there  is  little  social  surplus  avail- 
able in  the  former.  But  the  mere  production  of  wealth  and 


§  83]  Surplus  and  Progress.  203 

prosperity  does  not  suffice.  Unless  attention  be  paid  to  the 
problem  of  distribution  as  well,  the  social  surplus  may  remain 
in  the  hands  of  a  favored  few  —  the  "remnant"  of  whom 
Matthew  Arnold  sings  —  while  the  mass  of  the  community 
may  be  largely  shut  out  from  participation  in  its  benefits. 
The  real  democracy  of  industry,  like  the  true  democracy  of 
politics,  does  not  mean  that  every  man  is  the  equal  of  every 
one  Telse,  but  that  all  should  have  an  equal  opportunity  to  de- 
velop what  is  in  them  for  good.  The  problem  of  social  progress 
is  to  reconcile  the  greatest  possible  social  production  with  the 
best  possible  social  distribution ;  to  create  a  continually  grow- 
ing social  surplus  and  to  provide  for  its  equable  division. 
Without  the  latter  we  are  apt  to  have  plutocracy ;  without  the 
former  we  can  scarcely  rise  above  savagery. 


CHAPTER   XIV. 
THE   CAPITALIZATION   OF  VALUE. 

84.  References. 

J.  B.  Clark,  Distribution  of  Wealth  (1899),  ch.  ix ;  F.  A.  Fetter,  Prin- 
ciples ( 1904),  part  i,  div.  C ;  T.  Veblen,  Theory  of  Business  Enter- 
prise (1904),  chs.  v-vi ;  M.  Pantaleoni,  Pure  Economics  (1898),  part  3, 
ch.  iii,  §  5  ;  E.  v.  Bohm-Bawerk,  Positive  Theory  of  Capital  (1891),  bk. 
v,  chs.  i,  ii;  F.  v.  Wieser,  Natural  Value  (1893),  bk.  iv,  ch.  vii ;  H. 
Sidgwick,  Principles  (1883),  II,  ch.  vi;  J.  A.  Hobson,  Economics  of  Dis- 
tribution (1900),  ch.  iv;  Irving  Fisher,  What  is  Capital  (Econ.  Jour., 
VI,  1896) ;  C.  A.  Tuttle,  Real  Capital  Concept  (Quart.  Jour.  Econ.,  XVIII, 
1903) ;  W.  Z.  Ripley,  Capitalization  of  Public  Service  Corporations  (Ibid., 
XV,  1901);  E.  S.  Meade,  Trust  Finance  (1903),  ch.  xvi ;  R.  M.  Hurd, 
Principles  of  City  Land  Values  (1903),  ch.  ix. 

85.  Value  and  Rent. 

We  have  learned  that  the  value  of  anything  is  derived  ulti- 
mately from  the  satisfactions  or  uses  which  it  affords,  and  that 
the  price  is  the  money  equivalent  of  its  uses.  Some  things 
afford  only  a  single  use ;  the  use  of  an  ordinary  article  of  food 
consists  in  its  consumption.  Other  things  are  somewhat  more 
durable ;  a  suit  of  clothes  can  be  used  for  a  season  or  two  be- 
fore it  is  worn  out ;  a  machine  will  last  for  years ;  a  house  for 
decades.  Finally,  some  things  permit  of  perpetual  use.  A 
city  lot  will  serve  as  a  building  site  as  long  as  the  city  exists ; 
the  privilege  granted  to  a  street  railway  to  occupy  the  public 
highways  remains  the  same  from  decade  to  decade,  although 
the  recipient  of  the  privilege  may  change. 

Things  can  be  sold  either  by  parting  with  their  uses  one  by 
one  or  by  disposing  of  all  their  uses  for  a  lump  sum.  When  I 
ask,  what  is  the  price  of  a  carriage  ?  the  owner  will  answer,  ten 

204 


§  85]  Value  and  Rent.  205 

dollars  a  day  if  he  means  the  price  of  the  use  for  that  period,  or 
a  thousand  dollars  if  he  refers  to  its  use  as  long  as  it  lasts. 
When  we  part  with  the  use  of  a  thing  for  a  limited  period,  the 
payment  is  called  a  rent.  We  may  rent  a  horse  for  an  hour,  or  a 
dress-suit  for  an  evening,  or  a  typewriter  for  a  month,  or  a  house 
for  a  term  of  years.  Strictly  speaking,  the  word  rent  regards 
the  transaction  from  the  standpoint  of  the  one  who  lends  the 
use  and  secures  a  periodic  return  (redditus)  ;  while  the  word 
hire  designates  the  transaction  from  the  point  of  view  of  the 
one  who  enjoys  the  temporary  use.  Commonly,  however, 
this  distinction  is  disregarded,  and  we  speak  indiscriminately 
of  a  man  hiring  or  renting  a  yacht  or  a  house  for  his  own  use. 
The  fundamental  conception  is  the  income,  in  the  sense  of 
pleasure  or  benefit  income,  to  the  user.  Through  the  opera- 
tion of  the  social  forces  which  bring  about  exchanges  based  on 
money,  the  income  value  of  anything  becomes  its  money  rent, 
—  the  amount  of  money  received  by  the  owner  or  paid  by  the 
hirer.  The  income  of  anything  is  the  rent  paid  or  received 
for  its  use. 

Sometimes  the  word  rent  is  limited  to  particular  kinds  of 
rents.  In  England,  for  example,  where  land  formed  the  chief 
form  of  investment  even  as  late  as  the  eighteenth  century, 
rents  came  to  be  synonymous  with  land  rents,  and  when  a  man 
spoke  of  his  rent  roll,  he  meant  the  rentals  which  he  received 
from  his  estate.  As  a  consequence,  the  theory  of  rent  elabo- 
rated by  the  English  economists  came  to  have  a  peculiar 
meaning.  On  the  other  hand,  France,  in  the  century  before 
the  revolution,  had  made  greater  progress  in  general  financial 
enterprises,  and  rentes  came  to  mean  the  income  of  the  fund- 
holder.  A  rentier  to-day  still  denotes  one  who  is  living  on  the 
income  of  his  capital.  As  a  general  economic  conception, 
then,  rent  is  the  periodic  return  (nowadays  calculated  in 
money)  from  the  use  of  a  thing  for  a  definite  period,  whether 
that  thing  consists*  of  land,  or  public  funds,  or  anything  else. 
Rent  has  a  threefold  aspect,  (i)  From  the  point  of  view  of 
the  economic  good,  rent  is  the  product :  the  use  that  a  thing 


206  Capitalization  of  Value.  [§  86 

affords  is  its  product  or  rent.  (2)  From  the  point  of  view 
of  the  owner,  rent  is  the  income  from  the  use  or  product. 
(3)  From  the  point  of  view  of  the  hirer,  rent  is  the  cost  or 
payment  for  the  use.  People  pay  rents  because  they  receive 
in  return  an  income  in  the  shape  of  the  use  afforded  by  the 
thing  for  which  they  pay.  Rent  therefore  is  at  once  product, 
income  and  cost. 

When  we  part  with  anything  permanently,  instead  of  with 
some  of  its  uses  for  a  time,  we  often  speak  of  its  selling  or 
market  or  cash  value,  as  opposed  to  its  rental  value.  Strictly 
speaking,  this  contrast  is  inaccurate.  When  we  rent  anything, 
we  are  also  dealing  with  selling  value ;  but  what  we  sell  is  a 
single  use,  or  several  uses,  rather  than  all  its  uses.  Sometimes 
again  we  speak  of  property  value  as  opposed  to  rental  value. 
The  advantage  of  this  nomenclature  is  that  as  long  as  we  con- 
trol the  property  we  control  all  possible  present  and  future 
uses ;  the  disadvantage  is  that  property  is  a  legal  conception, 
while  rent  is  an  economic  conception.  A  man  also  has  prop- 
erty in  his  rents.  The  real  contrast,  as  was  pointed  out  above 
(§  6),  is  between  rental  value,  in  its  strict  meaning  of  income 
value,  and  capital  value.  When  a  man  sells  one  or  more  uses 
of  a  thing,  he  estimates  its  capital  value.  Roughly  speaking, 
he  rents  in  one  case  and  sells  in  another ;  strictly  speaking, 
he  sells  in  both  cases,  but  the  price  represents  a  limited  use 
in  one  case  and  an  unlimited  use  in  the  other. 

The  question  now  arises,  what  is  the  relation  of  rental  value 
to  capital  value,  and  how  do  we  come  to  estimate  capital 

values  ? 

86.   The  Law  of  Depreciation. 

The  durability  of  economic  goods  is  essentially  relative.  At 
the  one  end,  as  we  have  seen,  are  the  merely  ephemeral  acts 
or  things  which  are  consumed  by  a  single  use,  like  a  paper 
napkin  or  an  apple.  At  the  other  end  is  a  building  site,  which 
can  support  a  structure  to  the  end  of  time.  Between  these 
extremes  lie  the  great  mass  of  commodities.  They  all  wear 
out  sooner  or  later,  and  as  they  wear  out  they  become  incapable 


§  86]  Law  of  Depreciation.  207 

of  affording  as  many  or  as  effective  uses.  Sometimes  the  de- 
preciation is  rapid,  as  with  a  flimsy  silk  dress ;  sometimes  the 
commodity  lasts  longer,  as  in  the  case  of  an  ordinary  machine  ; 
sometimes  it  is  very  substantial,  as  in  the  case  of  a  modern  sky- 
scraper. In  every  instance,  however,  if  it  is  intended  to  be 
used  permanently,  repairs  are  needed.  Nothing  is  indestruc- 
tible except  land,  and  even  that  is  so,  as  we  shall  see  later 
(§  132),  only  in  the  peculiar  sense  that  its  extension  remains,, 
It  is  obvious  that  the  capital  value  of  anything  depends  in  the 
first  instance  on  the  number  of  rental  values,  allowance  being 
made  for  wear  and  tear.  Where  the  good  is  ephemeral  in  the 
sense  that  it  affords  only  a  single  use,  the  rental  value  and  the 
capital  value  coalesce.  The  rental  value  is  the  capital  value. 
We  cannot  buy  the  privilege  of  using  the  coal  or  ice  even  once, 
without  buying  the  coal  or  ice  itself.  The  wear  and  tear  here 
equal  the  entire  value,  the  single  use  is  the  consumption. 
When,  however,  we  may  expect  a  moderate  succession  of  uses, 
there  is  a  difference  between  the  rental  value  and  the  capital 
value.  Where  the  depreciation  is  rapid  the  difference  is  not 
great.  A  row-boat  is  quickly  worn  out,  and  even  a  single  use 
may  injure  it  severely.  A  boat  which  sells  for  sixty  dollars 
will  often  rent  for  half  that  amount  for  a  single  summer,  and 
the  selling  or  capital  value  is  then  only  double  the  rental  value. 
The  boat  may  last  for  several  years,  but  the  older  it  grows,  the 
greater  the  need  of  repairs  and  the  smaller  the  net  uses  which 
it  is  capable  of  yielding,  until  finally  the  expense  of  repair 
exceeds  the  income,  and  the  boat  is  thrown  aside  as  worthless, 
possessing  no  capital  value  because  it  no  longer  has  a  single 
rental  value.  Where  a  larger  number  of  uses  can  be  enjoyed 
with  comparatively  little  depreciation,  as  in  a  well-built  house, 
the  selling  value  is  frequently  ten  or  twenty  times  the  annual 
rental  value.  It  may  be  four  or  five  years  before  any  repairs 
are  needed,  but  with  each  ensuing  year  the  decay  progresses 
and  the  cost  of  repairs  augments,  until  here  also  the  time  ar- 
rives when  there  is  no  longer  any  surplus  of  income  over  outgo, 
of  enjoyment  over  exertion.  In  practical  life  business  men 


208  Capitalization  of  Value.  [§  86 

guard  against  the  results  of  depreciation  by  instituting  a  sinking 
fund.  Instead  of  spending  all  the  earnings,  they  set  aside  an 
annual  sum  which  will  counterbalance  the  depreciation,  so  that 
at  the  end  of  a  period  the  accumulated  fund  will  sink  or  offset 
the  outlay  incurred  to  replace  the  commodity.  The  repairs, 
in  other  words,  may  be  made  from  year  to  year,  or  may  be 
allowed  to  accumulate,  and  made  all  at  once  at  a  subsequent 
period.  Where  no  repairs  are  possible,  as  in  a  mine,  the  an- 
nual rent  must  still  exceed  that  of  ordinary  land  which  osten- 
sibly yields  the  same  annual  returns,  because  the  mine  will 
ultimately  be  exhausted  and  a  part  of  the  rent  must  be  put  to 
the  sinking  fund  or  depreciation  account,  or  goes  to  satisfy  the 
expectation  that  the  rental  value  will  cease. 

The  fundamental  explanation,  therefore,  of  the  relation  of 
capital  value  to  rental  value  is  durability,  or  the  degree  of 
succession  of  rental  values.  Capital  value  depends  on  net 
rent,  not  on  gross  rent ;  that  is,  it  depends  on  the  succession 
of  gross  returns,  less  repairs.  Capital  value  is  reached  by 
adding  together  the  gross  rentals  and  deducting  the  sinking 
fund.  The  ratio  of  capital  to  rental  value  depends  in  the  first 
instance  on  the  number  of  rental  values. 

This  does  not  mean  that  more  permanent  commodities  have 
a  greater  capital  value  than  less  durable  goods.  Iron  has  less 
value  than  silk,  although  it  is  far  more  durable.  The  statement 
means  that  when  the  gross  rental  of  two  commodities  is  the 
same  —  that  is,  when  the  price  paid  for  the  use  of  each  for  a 
definite  period  is  identical  —  the  difference  in  their  capital 
values  is  to  be  explained  by  the  relative  number  of  such  uses 
which  each  can  afford.  The  rent  of  a  house,  as  well  as  that  of 
a  horse,  may  be  twenty  dollars  a  month,  yet  the  house  will  sell 
for  far  more  than  the  horse.  Neither  would  have  any  capital 
value  if  it  had  no  rental  value.  The  rental  value  of  both  is  the 
same,  because  the  marginal  utility  of  a  month's  use  of  each  is 
identical ;  that  is,  the  individuals  forming  that  economic  group 
get  on  the  whole  as  much  satisfaction  out  of  a  horse  as  they 
do  out  of  a  house.  The  capital  value  of  the  horse,  however, 


§  87]  Law  of  Future  Estimates.  209 

is  less  than  that  of  the  house,  because  he  will  be  more  quickly 
worn  out,  —  that  is,  because  he  cannot  furnish  an  equally  long 
succession  of  uses. 

Capital  is  capitalized  income.  Capital  value  is  a  stock  or 
fund  of  rental  values ;  the  larger  the  number  of  such  rental 
values  which  flow  in  from  a  commodity,  the  greater  will  be 
its  capital  value  in  proportion  to  its  rental  value.  The  rela- 
tion of  capital  to  rental  value  depends  in  first  instance  upon 
durability. 

87.  The  Law  of  Future  Estimates. 

The  uncivilized  individual  lives  only  in  the  present.  His 
wants  are  spasmodic,  and  as  soon  as  he  has  gratified  these 
pressing  needs  he  has  no  thought  for  the  morrow.  With  every 
advance  in  culture  he  displays  more  prudence  and  foresight. 
Even  some  of  the  more  highly  developed  animals,  like  ants, 
bees  and  squirrels,  have  an  eye  to  the  future,  and  in  the  time 
of  plenty  lay  in  a  stock  for  the  days  to  come.  The  philoso- 
phers tell  us  that  the  real  pleasures  of  life  are  those  of  antici- 
pation and  retrospection.  But  this  is  true  only  of  the  most 
highly  organized  natures,  and  true  only  in  part  even  of  them. 
To  the  mass  of  individuals  present  needs  and  present  satisfac- 
tions are  the  all- engrossing  ones. 

The  result  of  this  psychological  fact  is  that  we  lay  more 
stress  on  present  enjoyments  than  on  future  enjoyments.  To 
the  average  man  a  bird  in  the  hand  is  worth  two  in  the 
bush,  even  though  he  thinks  that  he  will  secure  the  two. 
Our  estimate  of  the  future  is  more  or  less  uncertain,  because 
we  can  never  be  absolutely  sure  of  anything  but  the  actual. 
The  future  may  have  in  store  for  us  either  some  change  in  the 
intensity  of  our  wants  or  in  the  capacity  of  the  particular  ser- 
vice to  satisfy  our  wants.  Present  wants  and  satisfactions  are 
definitely  measurable,  because  the  degree  of  the  one  and  the 
quantity  of  the  other  are  fixed.  Future  wants  and  satisfactions 
are  less  definitely  measurable,  because  of  the  concurrent  or 
opposite  changes  that  may  take  place  before  the  future  ripens 

14 


2io  Capitalization  of  Value.  [§  87 

into  the  present.  Hence  the  underestimate  of  the  future  as 
compared  to  the  present.  That  is  what  we  mean  when  we 
speak  of  discounting  the  future  ;  we  •"  count  off"  a  part  of  the 
enjoyment  to  come. 

The  law  of  lower  future  estimates  is  a  part  of  a  larger  law, 
with  one  aspect  of  which  we  have  already  become  familiar. 
All  sense  impressions  may  be  reduced  to  those  of  space  and 
of  time.  When  we  deal  with  space  impressions  and  apply 
them  to  economic  life,  we  are  in  presence  of  the  law  of  dimin- 
ishing space  utility ;  every  additional  increment  in  the  supply 
of  an  actual  commodity  existing  in  space  has,  as  we  know, 
(§  73)  a  decreasing  importance.  When  we  deal  with  time  im- 
pressions, we  are  in  presence  of  the  law  of  diminishing  time 
utility ;  every  additional  postponement  in  the  enjoyment  of  a 
commodity  causes  it  to  have  a  decreasing  importance  for  us. 
Nothing  has  utility  unless  it  exists  in  space  and  time.  In- 
crease the  space  relation,  that  is,  augment  the  supply,  and  you 
decrease  the  marginal  utility ;  increase  the  time  relation,  that  is, 
postpone  the  gratification,  and  you  again  decrease  the  mar- 
ginal utility.  In  one  case  we  deal  with  a  margin  of  space ;  in 
the  other  with  a  margin  of  time.  The  effect  is  the  same. 
Increase  the  supply  to  a  certain  point,  and  marginal  utility  or 
value  will  disappear ;  augment  the  postponement  of  the  satis- 
faction to  a  certain  point,  and  the  marginal  utility  or  value 
will  likewise  disappear. 

The  present  estimate  of  a  future  satisfaction  is  therefore 
ordinarily  less  than  that  of  a  present  satisfaction  ;  the  present 
value  of  a  future  enjoyment  is  less  than  that  of  an  immediate 
enjoyment.  The  present  estimate  of  future  uses  becomes 
fainter  as  the  use  recedes  into  the  future,  until  the  value  of 
a  very  distant  use  vanishes.  Therefore,  while  a  commodity 
with  a  present  rental  value  may  hold  out  the  prospect  of 
many  successive  rental  values,  the  present  worth  of  each  of 
those  future  rental  values  becomes  progressively  smaller.  Since 
the  capital  value  of  anything  is  the  present  worth  of  all  the 
successive  future  rental  values,  it  is  clear  that  the  dispro- 


§  88]        Law  of  Diminishing  Returns.         211 

portion  between  the  rental  and  the  capital  value  will  not  grow 
simply  with  the  durability  of  the  commodity ;  for  the  more 
durable  the  commodity,  the  fainter  will  be  the  present  estimate 
of  the  distant  use,  until  finally  a  further  increase  in  durability 
will  add  nothing  to  the  value.  A  building  site  may  rent  for  a 
fixed  sum,  and  may  reasonably  be  expected  to  yield  that  rent 
for  an  indefinite  period.  Yet  when  it  is  sold  it  will  bring  as 
capital  value  a  sum  equivalent  only  to  about  twenty  or  twenty- 
five  times  the  rental  value.  There  is  no  depreciation  of  the 
land,  there  is  no  wear  and  tear,  and  no  necessity  for  a  sinking 
fund,  and  yet  the  land  is  worth,  as  it  is  called,  only  twenty 
years'  purchase ;  that  is,  it  can  be  purchased  for  a  sum  twenty 
times  the  annual  rent,  even  though  in  all  human  probability  it 
will  go  on  yielding  an  annual  rent  for  an  indefinite  future. 

The  relation  between  rental  and  capital  value,  therefore,  is 
a  resultant  of  two  forces,  —  the  law  of  depreciation  and  the 
law  of  future  estimates.  From  one  point  of  view,  the  more 
durable  the  commodity  and  the  larger  the  number  of  successive 
uses,  the  greater  will  be  the  disproportion  between  rental  and 
capital  value ;  from  another  point  of  view,  the  more  durable 
the  commodity  and  the  more  remote  the  succession  of  future 
uses,  the  less  will  the  disproportion  be.  Both  of  these  state- 
ments may  be  summed  up  in  the  assertion  that  the  capital 
value  of  anything  is  the  result  of  adding  together  the  present 
worth  of  each  of  the  successive  rental  values.  If  the  com- 
modity lasts  long  enough  to  furnish  two  .equal  annual  rental 
values,  the  capital  value  will  be  slightly  less  than  twice  the  first 
rental  value ;  if  we  may  expect  three  rental  values,  the  capital 
value  will  be  somewhat  less  than  three  times  the  first  rental 
value.  Each  increment  which  goes  to  form  the  capital  value 
decreases,  until  finally  there  is  no  further  increment  at  all. 

88.   The  Law  of  Diminishing  Returns. 

We  have  thus  far  dealt  with  consumers'  goods  —  that  is, 
articles  of  immediate  consumption  —  and  have  seen  that  their 
value  is  derived  from  the  uses  or  enjoyments  which  they  afford. 


212  Capitalization  of  Value.  [§  88 

Some  goods,  however,  do  not  afford  a  direct  enjoyment,  but 
are  used  as  instruments  to  produce  things  that  afford  enjoy- 
ments. These  are  hence  called  indirect,  or  instrumental,  or 
production  goods.  It  is  obvious,  however,  that  just  as  the 
capital  value  of  consumption  goods  is  derived  from  their  rental 
values  or  uses,  so  the  value  of  production  goods  is  derived 
from  the  value  of  their  products,  —  the  consumption  goods. 
The  value  of  the  raw  material  is  due  to  the  value  of  the  finished 
commodity.  The  value  of  pig  iron  depends  upon  the  value  of 
the  nails,  billets  and  other  iron  products  into  which  it  enters. 
The  value  of  labor  depends  on  the  value  of  what  the  labor 
produces.  Value  starts  with  direct  human  satisfactions,  and 
is  reflected  back  and  back  until  it  attaches  to  the  original 
agent,  act  or  thing  which  is  ultimately  responsible  for  the 
immediate  income  or  inflow,  of  satisfaction. 

The  fundamental  law  of  value  is  the  law  of  diminishing 
utility.  The  satisfaction  derived  from  successive  increments 
of  a  consumption  good  diminishes  as  the  supply  increases. 
When,  in  the  same  way,  we  compare  the  utility  of  different 
increments  of  production  goods  or  productive  agents  with  one 
another,  we  are  in  the  presence  of  the  law  of  diminishing 
returns.  Instead  of  the  diminishing  utility  of  direct  services 
afforded  by  something  consumed,  we  think  of  the  diminishing 
return  or  service  afforded  by  something  in  producing  the 
economic  good  which  we  consume.  If  a  man  tends  one  loom, 
he  will  turn  out  a  certain  quantity  of  cloth.  Double  the  looms 
and  he  will  do  double,  or  perhaps  more  than  double,  the  work  ; 
give  him  four  looms  and  the  output  will  be  fourfold.  After  a 
certain  limit  is  reached,  however,  the  care  of  each  additional 
loom  will  dissipate  his  energy  and  cause  more  mistakes.  The 
total  output  may  be  larger,  but  the  output  of  each  loom  will 
be  less,  until  finally  new  looms  will  not  augment  the  output 
at  all.  If  we  enlarge  the  supply  of  labor  instead  of  tools,  the 
same  holds  good.  More  effort  means,  after  a  given  point, 
relatively  smaller  results.  A  rower  may  increase  his  speed 
by  putting  forth  more  exertion,  but  after  a  certain  point  more 


§  88]        Law  of  Diminishing  Returns.         213 

efforts  do  not  mean  greater  speed.  An  increase  of  rowers 
will  not  change  the  law.  Two  men  will  not  row  a  boat  twice 
as  fast  as  one,  four  men  will  not  row  it  twice  as  fast  as  two. 
A  large  omnibus  will  hold  more  people  than  a  small  one,  but 
when  a  certain  size  has  been  reached,  it  will  pay  better  to  buy 
another  omnibus  than  to  enlarge  the  old  one.  On  a  piece  of 
land  it  may  be  profitable  to  employ  more  men  as  well  as  to 
use  more  manure  and  better  machinery ;  but  after  a  given 
point,  additional  "  doses  "  of  labor  and  capital  will  begin  to 
give  relatively  smaller  results.  The  law  of  diminishing  returns 
is  universal.  It  is  another  aspect  of  the  law  of  diminishing 
utility.  The  latter  springs  from  the  finite  nature  of  man,  the 
former  from  the  finite  nature  in  the  elements  of  his  environ- 
ment. The  income  or  return  from  a  production  good  or 
productive  agent  is  like  the  income  or  utility  of  a  consumption 
good.  The  test  of  each  is  its  relative  contribution  to  the 
satisfaction  of  wants. 

Just  as  the  law  of  decreasing  utility  results  in  the  conception 
of  marginal  utility  —  the  foundation  of  all  value  —  so  the  law 
of  diminishing  returns  results  in  the  conception  of  marginal 
utilization.  This  margin  is  the  point  beyond  which  an  addi- 
tional effort  will  not  give  a  sufficient  return.  The  margin 
may  be  either  intensive  or  extensive.  If  we  crowd  more 
people  into  the  same  omnibus,  or  run  more  trains  over  the 
same  track,  or  make  the  laborer  tend  more  looms,  or  put  more 
manure  into  the  same  field,  we  have  a  more  intensive  utiliza- 
tion, until  finally  the  intensive  margin  is  reached  where  the 
additional  returns  will  not  compensate  the  additional  effort 
or  outlay.  On  the  other  hand,  the  crowding  of  the  omnibus 
may  drive  passengers  to  another  line,  the  multiplication  of 
trains  may  cause  accidents,  the  added  looms  may  mean  more 
breakage,  the  increase  of  manure  may  be  unduly  costly.  In 
such  cases  the  owner  will  find  it  profitable  to  purchase  new 
vehicles,  build  a  double  track,  hire  more  workmen,  or  secure 
additional  plots  of  fresher  land.  This  would  be  an  extensive 
utilization,  carried  on  until  the  extensive  margin  is  reached, 


214  Capitalization  of  Value.  [§89 

when  it  will  not  pay  to  add  another  vehicle,  track,  laborer  or 
plot.  The  margin,  whether  intensive  or  extensive,  ii  reached 
through  the  operation  of  the  law  of  diminishing  returns.  Just 
as  the  value  of  every  consumption  good  depends  upon  its 
marginal  utility,  so  the  value  of  every  production  good  or 
productive  agent  (which  is  derived  from  the  consumption 
goods  which  it  produces)  depends  upon  its  marginal  product, 
that  is,  its  product  at  the  margin  of  utilization. 

89.  Forms  of  Value. 

If  we  analyze  the  things  that  are  bought  and  sold  in  the 
market  we  find  that  they  may  be  divided  into  four  classes  : 
first,  human  services,  from  those  of  the  day  laborer  to  those 
of  the  highest  professions;  second,  concrete  goods,  or  com- 
modities, whether  production  goods  or  consumption  goods; 
third,  relations  and  privileges  of  all  kinds ;  fourth,  a  fund  of 
capital. 

(i)  In  the  first  class  obviously  only  the  single  use  can  be 
sold.  A  service  is  a  use,  it  is  not  a  fund  of  stored  up  uses. 
Here,  then,  the  selling  price  of  the  economic  good  (the 
service)  is  the  rental  price.  We  speak  of  hiring  a  man,  just 
as  of  hiring  a  piano.  When  we  hire  him  for  a  definite  task, 
we  rent  his  service ;  if  we  engage  him  by  the  day  or  month  or 
year,  we  rent  a  limited  succession  of  services.  The  only  way 
in  which  all  the  services  of  the  man  can  be  sold  at  once  is 
when  he  is  a  slave,  and  thus  acquires  a  definite  money  value 
as  a  piece  of  property.  In  a  state  of  freedom  a  man  never 
parts  with  all  his  future  services  for  a  lump  sum.  The  price 
paid  for  human  services  is  not  commonly  called  rent,  although 
we  do  speak  of  an  Italian  padrone  in  America  renting 
out  his  immigrant  compatriots,  or  of  the  Southern  prison 
officials  renting  out  their  convicts.  Ordinarily  the  income 
derived  from  human  services  is  called  wages  (or,  in  the  case 
of  the  professional  classes,  salaries  or  fees).  Wages,  then,  are 
always  income ;  they  are  never  capital,  nor  can  they  be 
capitalized  except  in  the  case  of  slavery.  It  is  only  then 


§  89]  Forms  of  Value.  2 1 5 

that  we  can  properly  speak  of  human  capital,  or  of  capital 
invested  in  human  beings. 

The  next  two  categories,  which,  as  we  shall  see  later,  differ 
in  important  ways,  may  be  classed  together  in  this  respect,  that 
they  both  possess  a  rental  or  income  value  as  well  as  a  capital 
value.  A  piece  of  land,  a  ship  and  a  patent  right  may  either 
be  rented  out  from  year  to  year  or  parted  with  entirely  for  a 
lump  sum.  Their  product  is  always  a  rent,  although  the  rent 
may  be  capitalized. 

Finally,  as  opposed  to  individual  economic  goods  which 
have  a  capital  value,  there  is  the  general  fund  of  capital.  Just 
as  we  speak  of  wealth  in  general  as  consisting  of  pieces  of 
wealth,  or  of  labor  in  general  as  composed  of  the  individual 
laborers,  so  we  speak  of  capital  in  general  as  the  assemblage 
of  individual  pieces  of  capital.  Capital  as  a  general  concep- 
tion stands  in  the  same  relation  to  the  individual  pieces  of 
capital  as  a  flock  does  to  the  sheep  or  a  forest  to  the  trees ; 
the  sheep  and  trees  are  constantly  disappearing  and  being 
replaced  by  new  accessions ;  the  flock  or  forest  persists, 
although  the  constituent  elements  are  perpetually  changing. 
Capital  as  a  fund  of  wealth  is  the  embodiment  of  value  or 
purchasing  power,  and  money  is  everywhere  the  measure 
of  general  purchasing  power.  Capital,  therefore,  as  a  fund 
of  value  can  be  estimated  or  transferred  in  the  shape  of  the 
money  which  represents  this  value.  We  cannot  buy  the  flock 
of  sheep  without  buying  the  individual  sheep,  but  through 
the  interposition  of  money  and  credit  we  can  acquire  capital 
in  the  shape  of  general  purchasing  power,  and  then  devote  it 
to  any  use  we  desire.  We  can  use  it  in  production  and  build 
a  factory,  or  we  can  use  it  for  consumption  and  buy  a  yacht. 
We  can  put  the  fund  of  capital  into  concrete  goods  like 
machines  or  land,  or  into  privileges  like  franchises  or  patents. 
When  we  buy  capital  in  general,  therefore,  we  buy  the  right  of 
enjoying  any  future  uses  that  we  may  elect ;  we  are  not  restricted 
to  the  particular  uses  afforded  by  the  individual  good  in  which 
our  capital  is  temporarily  embodied.  The  use  of  the  sheep  is 


2 1 6  Capitalization  of  Value.  [§  89 

limited ;  the  use  of  the  capital  invested  in  the  sheep  is  poten- 
tially unlimited,  because  it  can  be  changed  at  will  to  any  other 
form. 

When  we  purchase  the  temporary  use  of  an  individual 
economic  good,  therefore,  we  pay  a  rent;  but  when  we  pur- 
chase the  temporary  use  of  a  fund  of  capital  in  general,  the 
payment  is  called  interest.  Interest,  hence,  is  nothing  but 
commuted  rent,  just  as  capital  is  nothing  but  capitalized 
income.  Instead  of  hiring  a  particular  piece  of  capital  and 
paying  rent,  we  hire  a  fund  of  capital  in  general  and  pay 
interest.  Interest,  then,  is  not  paid  for  money,  but  for  the 
capital  which  the  money  represents.  It  is  really  not  paid  for 
the  capital,  but  for  the  uses  afforded  by  the  capital  when 
transmuted  into  the  individual  things  which  afford  services. 
Interest  of  capital  is  based  upon  the  rents  of  individual  pieces 
of  capital.  The  single  thing  yields  a  rent  because  it  affords  a 
return  or  product.  If  we  add  together  all  the  net  rents  of 
existing  goods  or  pieces  of  capital,  we  get  the  entire  amount  of 
interest.  Total  net  rent  at  any  given  time  is  equal  to  total 
interest.  Each  consists  of  the  whole  of  the  product  or  income 
from  all  existing  wealth  which  is  or  can  be  capitalized,  —  that 
is,  of  the  aggregate  of  the  return  from  all  existing  pieces  of 
capital.  The  only  difference  is  that  interest  is  the  calculation 
form  of  rent.  Rent  is  figured  in  dollars  and  cents;  interest 
as  commuted  rent  is  figured  as  a  part  of  the  whole  or  as  a 
percentage  of  a  principal.  The  rent  of  a  house  is  so  many 
dollars  a  year,  the  interest  of  the  capital  invested  in  the  house 
is  so  much  per  cent  a  year. 

Wages,  rent  and  interest,  therefore,  are  analogous  phenom- 
ena. They  are  all  prices,  even  though  prices  in  the  language 
of  the  street  are  ordinarily  restricted  to  the  selling  values  of 
concrete  objects.  When  we  contrast  wages  and  prices,  we 
really  contrast  prices  of  human  services  with  prices  of  things ; 
when  we  contrast  rents  and  prices,  we  really  contrast  rental 
values  of  things  with  capital  values  of  things.  Wages  are  the 
price  of  the  services  of  man  ;  rent  is  the  price  of  the  services 


§  90]  Value  as  a  Differential.  2 1 7 

of  particular  things  and  relations,  that  is,  particular  pieces  of 
capital ;  interest  is  the  price  of  services  of  the  general  fund  of 
capital.  At  the  one  end  is  labor,  which  can  never  be  capital- 
ized ;  at  the  other  end  is  the  fund  of  capital,  which  is  always 
capitalized;  in  between  are  the  individual  economic  goods, 
whose  services  may  or  may  not  be  capitalized,  and  for  which 
people  will  pay  either  rents  or  so-called  prices. 

90.   Value  as  a  Differential. 

All  value  may  be  considered  as  a  differential.  In  each 
variety  of  goods  there  will  be  different  grades  corresponding 
to  different  uses.  A  good  boat  will  rent  for  more  than  a  poor 
one  •  and  if  it  is  "  no  good  "  at  all,  it  will  not  rent  for  any- 
thing. Rent  therefore  may  be  measured  as  a  differential  from 
a  margin  or  base  line  of  no-rent,  and  the  rent  of  anything  may 
equally  well  be  denned  to  be  the  differential  return  or  surplus 
over  the  no-rent  or  marginal  articles  of  the  class. 

It  must,  however,  not  be  forgotten  that  almost  everything 
is  susceptible  either  of  more  than  a  single  kind  of  use  or  of 
different  uses  to  different  people.  The  boat  may  be  useless  for 
sailing,  but  good  for  rowing ;  it  may  be  useless  for  rowing,  but 
excellent  for  firewood.  A  piece  of  land  may  be  of  no  use  for 
wheat-raising,  but  good  for  alfalfa  ;  it  may  be  useless  for  alfalfa, 
but  admirably  adapted  to  pasture.  The  margin  or  base,  there- 
fore, from  which  rents  are  calculated  may  be  only  a  relative 
and  not  an  absolute  no-rent  margin.  The  rent  of  a  particular 
plot  of  good  wheat  land  may  be  calculated  as  the  surplus 
produce  over  the  worst  plot  at  the  margin ;  but  that  no-wheat- 
rent  plot  may  yield  a  substantial  rent  as  perhaps  the  best 
of  pasture  plots.  It  is  only  when  a  given  object  is  of  no 
use  for  any  purpose  that  we  can  speak  of  an  absolute  no-rent 
margin. 

Since  therefore  the  uses  of  things  shade  into  each  other,  we 
can  take  any  use  as  a  margin  or  base  from  which  to  measure  a 
higher  use.  The  rent  of  anything  may  be  regarded  as  a  differ- 
ential surplus  over  a  lower  use,  or  as  a  margin  from  which  to 


2 1  8  Capitalization  of  Value.  [§  90 

measure  a  higher  use.  All  value  is  the  expression  of  marginal 
utility ;  each  margin  is  relative  as  compared  to  some  other 
margin.  Rent  as  the  quantitative  expression  of  this  marginal 
utility  may  be  estimated  either  as  a  whole  or  as  a  surplus  over 
something  else. 

In  precisely  the  same  way  capitalized  rent,  or  selling  value, 
may  be  regarded  as  a  surplus.  If  a  fine  sail-boat  sells  for  one 
hundred  dollars,  we  can  regard  twenty  dollars  as  a  surplus 
value  of  a  fine  boat  over  a  poorer  one ;  another  twenty  dollars 
as  a  surplus  of  a  poor  sail-boat  over  a  good  row-boat ;  and  so 
on  until  finally  the  last  of  the  hundred  dollars  will  represent 
a  surplus  of  the  worst  boat  over  a  boat  which  is  not  even  good 
enough  to  use  as  firewood.  Again,  what  'is  true  of  rent  is  true 
of  wages.  Rent  is  the  income  from  things,  wages  the  income 
from  acts ;  both  are  the  income  from  services.  The  wages  of 
a  particular  man  or  class  may  be  regarded  as  a  surplus  over 
the  wages  of  a  lower  grade  class,  until  finally  we  get  to  the 
individual  who  receives  no  wages  at  all  because  he  is  of  no 
use,  and  who,  if  he  survives,  must  be  supported  by  the  com- 
munity. The  law  of  wages  must  be  the  same  as  the  law  of 
rent,  because  wages  are  really  rents  of  a  certain  kind,  rents  of 
acts  instead  of  rents  of  things.  When  therefore  the  traditional 
discourses  of  economics  speak  of  the  rent  principle,  or  of 
"  quasi-rents,"  in  the  sense  of  temporary  instead  of  permanent 
or  normal  surpluses,  they  are.  correct  as  far  as  they  go,  but  do 
not  go  far  enough.  What  they  really  mean  is  the  differential 
principle,  which  is  true  of  all  incomes,  whether  land  rents  or 
other  rents,  whether  rents  in  general  or  other  selling  values, 
whether  the  income  of  things  or  of  services. 

When  we  deal  with  the  fund  of  value  known  as  capital  in- 
stead of  with  individual  pieces  of  capital,  we  are  also  in  the 
presence  of  a  differential,  but  in  another  sense.  Individual 
commodities  differ  in  grade  of  utility,  and  therefore  their  rents 
(and  capital  values)  differ.  Capital  as  a  fund,  on  the  other 
hand,  is  the  money  value  of  all  existing  commodities  lumped 
together.  Individual  commodities  are  heterogeneous ;  the 


§  91]  Rental  and  Capital  Values.  219 

fund  of  capital  is  homogeneous.  There  is  no  general  rate  of 
rents ;  there  is  a  general  rate  of  interest.  Hence  interest 
cannot  be  a  differential  in  the  same  sense  as  rent.  Yet  the 
word  "  interest  "  itself  means  difference.  Interesse  in  Latin  was 
the  sum  that  lay  between  (inter)  the  original  loan  and  its 
return.  Although  the  mediaeval  writers  confused  money  and 
capital,  thinking  that  interest  was  paid  for  the  use  of  the 
money  itself,  they  nevertheless  justified  interest,  so  far  as  it  was 
a  recompense  for  the  delay  in  repayment.  We  who  now  know 
that  interest  is  a  method  of  calculating  rent  realize  that  it  is 
not  simply  a  question  of  delaying  repayment,  but  of  postpon- 
ing enjoyment,  and  that  interest  may  be  measured  not  only 
positively,  but  as  a  differential  or  surplus  of  present  over  future 
values. 

Interest,  in  other  words,  is  a  discount,  or  difference  between 
the  present  and  future.  When  a  banker  discounts  a  bill,  he 
deducts  from  the  face  value  a  sum  equivalent  to  the  interest 
for  the  period  the  bill  has  to  run.  Both  rent  and  interest, 
therefore,  as  forms  of  value,  express  an  estimate  of  marginal 
uses.  Rent  regarded  as  a  differential  deals  with  the  marginal 
uses  in  space  ;  interest  regarded  as  a  differential  deals  with  the 
marginal  uses  in  time.  Rent  is  the  difference  in  the  value  of 
one  present  enjoyment  over  another;  interest  is  the  difference 
in  the  value  of  a  present  over  a  future  enjoyment.  How  the 
estimate  of  this  difference,  or  the  rate  of  interest,  is  arrived  at 
in  actual  life  is  a  matter  for  later  consideration  (§  168). 

91.   Relation  of  Rental  and  Capital  Values. 

Since  interest  is  commuted  rent  and  capital  is  capitalized 
rent,  it  might  be  assumed  that  rental  values  and  capital  values 
of  the  same  things  would  always  vary  together.  If  a  house 
rents  for  the  same  amount  in  New  York  as  in  Yukon,  or  if  a 
house  to-day  rents  for  as  much  as  it  did  ten  years  ago,  ought 
not  the  capital  value  to  be  the  same  ?  In  point  of  fact,  how- 
ever, there  is  no  such  exact  correspondence  between  rental 
and  capital  values.  This  is  due  to  several  causes. 


22O  Capitalization  of  Value.  [§  91 

In  the  first  place,  the  rate  of  capitalization  is  only  another 
way  of  describing  the  rate  of  interest.  The  rate  of  interest, 
however,  or  the  degree  of  discounting-of  the  future,  differs  from 
place  to  place  and  from  age  to  age.  The  rental  value,  that 
is,  the  income,  of  a  given  railway  bond  a  few  years  ago  was  six 
dollars  a  year,  and  its  capital  value  one  hundred  dollars.  At 
present,  with  no  changes  of  importance  in  the  character  or 
earnings  of  the  railroad  itself,  the  same  bond,  with  the  same 
income,  is  worth  half  as  much  again.  This  increase  of  fifty  per 
cent  in  the  proportion  of  capital  value  to  rental  value  is  due  to 
the  fall  in  the  general  rate  of  interest  on  all  similar  capital 
from  six  to  three  or  four  per  cent.  The  discount  on  future  en- 
joyments has  appreciably  diminished.  What  is  true  of  the  part 
of  a  fund  of  capital  represented  by  bonds,  is  true  of  the  indi- 
vidual pieces  of  capital  like  a  house.  Two  houses  that  rent  for 
the  same  amount  in  New  York  and  Yukon  will  sell  for  very  dif- 
ferent sums,  because  the  rate  of  interest  is  low  in  New  York 
and  high  in  Yukon.  The  cause  of  changes  in  interest  will  be 
studied  later. 

Secondly,  since  capital  value  depends  on  an  estimate  of 
the  future,  it  is  often  much  more  uncertain  than  rental  value. 
It  is  affected  by  all  sorts  of  hopes  and  fears.  It  is  subject 
to  the  play  of  speculation.  Rental  value  deals  with  the 
present  moment  or  the  immediate  future ;  we  are  reasonably 
certain,  so  far  as  anything  mundane  is  certain,  of  the  exact 
quantum  of  enjoyment.  Capital  value  as  a  summation  of 
more  or  less  distant  enjoyments  is  exposed  to  all  the  muta- 
tions of  human  experience.  The  same  rental  values  may 
mean  now  relatively  high,  and  now  relatively  low,  capital 
values.  A  comparison  in  1901  of  47  industrial  corporations 
with  37  railroads  showed  earnings  of  13.6  per  cent  on  the 
market  value  of  the  industrial  stocks,  and  4.85  on  that  of 
railroad  stock.  The  same  income  or  rental  value,  in  other 
words,  represented  a  difference  of  almost  300  per  cent  in 
capital  value.  Rental  values,  no  matter  how  they  fluctuate, 
are  more  stable  than  capital  values.  That  this  is  true  of  the 


§  90  Rental  and  Capital  Values.  221 

fund  of  capital  is  obvious  to  any  one  who  watches  the  transac- 
tions on  the  stock  exchange.  That  it  is  equally  true  of  indi- 
vidual pieces  of  capital  can  be  seen  when  we  remember  that 
in  the  ante-bellum  days  of  the  South,  when  negroes  were 
simply  a  part  of  capital,  the  rental  price  of  slaves  in  1820  and 
1860  remained  at  about  the  same  figure,  $110,  while  the 
capital  value  of  slaves  increased  from  a  few  hundred  dollars  to 
$1500  or  $2000.  This  growing  disproportion  between  capital 
and  rental  value  was  indeed  due  in  part  to  the  fall  in  the  rate 
of  interest,  but  in  far  greater  measure  to  the  over-capitalization 
of  slaves  resulting  from  the  peculiar  economic  conditions  of 
the  time. 

Finally,  in  the  third  place,  where  there  are  special  advan- 
tages in  the  permanent  as  opposed  to  the  temporary  possession 
of  certain  things,  capital  values  will  be  relatively  higher  than 
the  rental  values.  In  England  a  country  estate  is  prized  for 
the  social  and  political  advantages  it  brings,  —  and  these  ad- 
vantages accrue  not  to  the  annual  tenant  but  to  the  owner. 
It  is  not  surprising,  therefore,  to  find  that  at  the  end  of  the 
eighteenth  century  land  in  England  was  worth  from  twenty- 
eight  to  thirty  years'  purchase,  while  funded  property  was  worth 
only  from  sixteen  to  eighteen  years'  purchase.  The  dispro- 
portion is  less  to-day,  but  still  appreciable. 

Capital  value  is  therefore  always  based  on  rental  value,  but 
their  relation  is  not  constant.  It  becomes  necessary,  there- 
fore, to  go  a  step  further  and  to  study  the  causes  which  fix 
values  in  general  and  which,  in  explaining  relative  variations, 
will  throw  more  light  on  the  relation  itself. 


CHAPTER   XV. 
DETERMINATION   OF  MARKET   VALUE. 

92.  References. 

M.  Pantaleoni,  Pure  Economics  (1898),  part  2,  chs.  i-iii;  A.  Marshall, 
Principles  (1898),  bk.  v,  chs.  i-ii;  J.  S.  Nicholson,  Principles  (1901),  bk. 
iii,  chs.  iii,  iv;  E.  v.  Bohm-Bawerk,  Positive  Theory  (1891),  bk.  iv,  chs. 
i-vi;  F.  v.  Wieser,  Natural  Value  (1893),  bk-  "J  A-  T-  Hadley,  Eco- 
nomics (1896),  ch.  iii ;  H.  Sidgwick,  Principles  (1883),  bk.  ii,  ch.  ii;  A.  W. 
Flux,  Principles  (1904),  ch.  iii;  H.  R.  Seager,  Introduction  (1904),  ch.  v; 
J.  E.  Cairnes,  Leading  Principles  (1874),  part  I,  chs.  ii,  iv ;  J.  A.  Hobson, 
Economics  of  Distribution  (1900),  ch.  i,  and  Economics  of  Bargaining 
(Econ.  Rev.,  IX,  1899) ;  F.  A.  Walker,  Political  Economy  (1888),  part  3, 
ch.  i. 

93.    Demand  and  Supply. 

All  value,  as  we  know,  is  the  reflex  of  social  marginal  utility. 
We  have  now  to  study  the  nature  of  the  social  forces  which 
operate  to  translate  into  actual  prices  on  the  market  the  feel- 
ings of  the  individuals  that  comprise  the  group. 

For  the  purposes  of  our  immediate  study  it  makes  no  differ- 
ence whether  we  are  dealing  with  rental  or  capital  values,  or 
again  with  values  of  services  or  values  of  things.  The  general 
principle  of  value  must  be  true  of  all  kinds  of  value.  It  will 
suffice  in  this  chapter  to  take  as  a  type  the  capital  or  selling 
value  of  ordinary  consumption  goods,  remembering  that  every- 
thing here  said  is  equally  applicable  to  all  other  forms  of  value. 

It  is  a  truism  to  affirm  that  value  depends  on  demand  and 
supply.  Strictly  speaking,  demand  denotes  desire.  Since 
one's  desire  for  anything  diminishes  with  additional  incre- 
ments, demand  is,  strictly  speaking,  the  scale  of  the  degree  of 
utility.  A  given  scale  affords  the  law  of  demand.  If  one's 

222 


§  94]  Market  and  Normal  Price.  223 

desire  for  anything  for  some  reason  increases,  so  that  he  is 
willing  to  give  more  for  the  same  amount,  we  might  in  this 
sense  speak  of  a  rise  in  the  demand,  that  is,  a  change  in  the 
scale  of  demand.  On  the  other  hand,  if  there  are  several 
people  who  prize  the  commodity  differently,  a  fall  in  the  price 
would  enable  more  individuals  to  satisfy  their  desire,  even 
though  the  scale  of  demand  of  each  remained  unaltered. 
There  would  really  be  an  extension  of  the  consumption,  but 
not  of  the  demand. 

Yet  in  the  ordinary  language  of  economic  life  demand  means 
not  simply  desire,  but  effective  desire,  —  a  desire  which  will 
have  some  effect  in  the  transactions  of  the  market.  Demand 
has  therefore  come  to  mean  elliptically  the  quantity  demanded 
at  a  given  price  ;  and  when  we  speak  of  a  change  in  the  demand, 
we  refer  not  to  any  alteration  in  the  subjective  scale  of  desire, 
but  to  a  change  in  the  amount  asked  for. 

In  the  same  way  supply  has  come  to  mean  the  quantity 
offered  at  a  given  price  in  the  market.  It  no  longer  denotes 
the  total  amount  in  existence.  That  part  of  the  total  stock 
which  is  not  offered  for  sale  at  a  definite  price  is  not  an  effective 
supply.  The  grain  or  cotton  that  is  allowed  to  rot  in  the  barn 
or  on  the  fields  has  no  influence  on  the  price. 

94.    Market  and  Normal  Price. 

By  a  market  was  originally  meant  a  place  in  which  individuals 
met  for  the  exchange  of  commodities  and  services.  Nowadays 
a  market  means  a  coming  together  of  offers  and  demands  for 
economic  goods,  irrespective  of  the  physical  presence  of  the 
contracting  parties.  The  market  may  be  local,  national  or 
international ;  wherever  definite  quantities  of  goods  are  bought 
and  sold,  there  is  a  market,  and  the  price  at  which  the  exchange 
is  effected  is  the  market  price. 

From  the  nature  of  the  case  this  price  is  subject  to  tempo- 
rary variations,  —  the  higgling  of  the  market,  as  Adam  Smith 
called  it.  The  point  about  which  the  market  price  oscillates 
is  called  the  normal  price,  and  sometimes,  although  less 


224  Market  Value.  [§  94 

happily,  the  natural  price,  as  being  the  point  to  which  the 
price  would  naturally  gravitate  if  there  were  no  oscillations. 
Market  price  is  like  the  surface  of 'the  water  agitated  by  the 
winds,  —  the  waves  are  now  above,  now  below  the  surface, 
yet  as  long  as  the  winds  persist  we  never  see  the  glassy  surface. 
The  alternate  activity  of  buyers  and  sellers  is  the  wind  of 
commerce,  which  prevents  the  normal  price  from  becoming 
visiole. 

Normal  price  itself  may  be  regarded  from  two  points  of  view. 
If  the  conditions  of  production  and  consumption  are  perfectly 
stationary — that  is,  if  there  are  no  changes  in  population,  amount 
of  capital,  methods  of  production  or  social  demand — we  speak 
of  static  conditions.  Such  a  state  is  largely  hypothetical, 
because  in  all  progressive  society  conditions  are  continually 
changing  or  dynamic.  The  law  is  one  of  movement,  not  of 
rest.  Yet  the  study  of  static  conditions  is  important.  Static 
normal  value  is  like  the  level  of  a  pond ;  we  can  study  it  only 
on  the  assumption  that  there  is  no  motion  of  any  kind. 
Dynamic  normal  value  is  like  the  level  of  an  ocean  bay,  where 
the  tide  ebbs  and  flows  and  the  level  is  slowly  changing ;  mar- 
ket value  is  like  the  surface  when  agitated  by  the  wind.  To 
ascertain  the  laws  of  value  we  must  not  only  study  the  forces 
that  produce  the  higgling  of  the  market,  —  that  is,  the  winds 
that  disturb  the  surface ;  we  must  also  study  the  forces  which 
change  the  level  of  prices,  —  that  is,  the  strength  of  the  tidal 
current  and  the  conformation  of  the  shores ;  we  must  finally 
study  the  causes  of  the  original  level  itself,  —  that  is,  the  source 
of  the  supply,  the  volume  of  the  water  and  the  depth  of  the 
bed.  For  instance,  wages  in  America  oscillate  from  season  to 
season,  they  have  changed  from  century  to  century,  and  at  all 
times  they  have  been  on  a  different  level  from  European 
wages. 

We  begin,  therefore,  with  the  study  of  market  value.  We 
must,  however,  first  understand  the  conditions  that  make  ex- 
change itself  possible. 


§  95]  Conditions  of  Exchange.  225 


95.    The  Conditions  of  Exchange  —  The  Law  of  Comparative 
Utilities  and  Comparative  Costs. 

Let  us  suppose  that  A  possesses  salt  and  B  tea,  and  that  each 
is  willing  to  trade.  All  that  is  necessary  to  an  exchange  is  that 
A's  liking  for  tea  as  compared  to  salt  should  be  different  from 
B's.  It  is  not  necessary  that  A's  preference  should  be  the 
opposite  of  B's.  Both  A  and  B  may  like  tea  more  than  salt, 
but  if  A  likes  a  pound  of  tea  four  times  as  much  as  a  pound  of 
salt,  and  B  only  twice  as  much,  they  will  be  willing  to  exchange. 
If  three  pounds  of  salt  are  given  for  one  of  tea,  A  will  be 
satisfied,  for  he  would  have  been  willing  if  necessary  to  give 
another  pound  of  salt  for  the  tea ;  and  B  will  be  satisfied 
because  instead  of  the  two  pounds  of  salt,  which  he  considers 
the  equivalent  of  a  pound  of  tea,  he  gets  three  pounds.  Nor 
does  the  fact  of  an  exchange  tell  us  anything  about  the  abso- 
lute preferences  of  the  two  parties.  If  A  and  B  are  willing  to 
trade  tea  and  salt,  pound  for  pound,  it  does  not  follow  that  A 
likes  tea  more  than  B,  or  that  B  likes  salt  more  than  A.  A  may 
like  salt  more  than  B  and  yet  give  it  up,  provided  he  likes  the 
tea  much  more  than  salt,  and  at  the  same  time  likes  both  tea 
and  salt  much  more  than  B.  Suppose  A  gets  ten  units  of 
satisfaction  from  a  pound  of  tea  and  five  from  a  pound  of  salt, 
while  B  gets  one  unit  of  satisfaction  from  a  pound  of  tea  and 
two  from  a  pound  of  salt.  B  will  then  give  up  the  tea  because 
he  saves  one  unit,  and  A,  although  he  likes  salt  more  than 
B  does,  will  give  it  up  because  he  saves  five  units. 

The  fact  of  exchange  thus  tells  us  only  that  A's  liking  for 
salt  as  compared  with  tea  is  different  from  B's ;  it  tells  us 
nothing  as  to  whether  A  likes  salt  more  than  tea,  or  whether 
A  likes  either  salt  or  tea  more  than  B.  In  technical  language, 
an  exchange  tells  us  only  that  there  is  a  disparity  in  the  mar- 
ginal utilities  of  the  articles  for  the  two  parties,  or  that  there  is 
a  difference  in  the  reciprocal  demand ;  it  tells  us  nothing  as  to 
the  marginal  utility  of  either  commodity  for  either  party.  The 
rate  of  exchange  depends  on  the  degree  of  this  disparity,  and 

15 


226  Market  Value.  [§  96 

the  law  of  exchange  may  be  stated  as  the  law  of  comparative 
marginal  utilities,  or  the  law  of  reciprocal  demand. 

A  and  B,  however,  had  to  secure  their  salt  and  tea.  It  cost 
them  something.  A  difference  in  reciprocal  demand  means  a 
difference  in  the  demand  as  compared  to  the  supply.  This  is 
the  same  as  saying  that  it  is  a  difference  in  the  supply  as  com- 
pared to  the  demand.  When  we  speak  of  supply  we  think  of 
marginal  cost,  just  as  when  we  speak  of  demand  we  think  of 
marginal  utility.  Exchange  may  therefore  be  explained  in 
terms  of  cost  as  well  as  in  terms  of  utility ;  and  the  law  of 
exchange  may  equally  well  be  stated  as  the  law  of  comparative 
costs.  I  may  be  so  much  more  intelligent  than  my  furnace 
man  that  I  could  save  much  coal  by  tending  the  furnace 
myself;  yet  I  prefer  to  look  after  my  business,  and  let  him 
tend  the  furnace,  because  it  pays  each  of  us  better  to  do  so. 
The  law  of  comparative  costs  and  of  reciprocal  demand  is  the 
foundation,  not  only  of  international  trade  as  the  older  econo- 
mists explained,  but  of  all  exchanges,  that  is,  of  all  economic 
transactions. 

96.  The  Rate  of  Exchange  —  Barter. 

Having  ascertained  the  fundamental  condition  of  exchange, 
let  us  now  turn  to  the  rate  of  exchange.  Suppose  that  A  and 
B  both  like  tea  more  than  salt.  A  begins  by  offering  ten 
pounds  of  salt  for  one  of  tea,  but  really  wants  it  so  badly 
that  he  would  if  necessary  go  as  high  as  sixty  for  one.  B, 
on  the  other  hand,  is  willing  to  give  up  some  tea,  but  only 
at  the  rate  of  one  pound  of  tea  for  twenty  of  salt.  At  the 
same  time  he  thinks  that  A  needs  tea  far  more  than  he  (B) 
cares  for  the  salt,  and  therefore  begins  by  saying  that  he  will 
take  not  less  than  seventy  pounds  of  salt  for  one  of  tea. 

It  is  plain  that  an  exchange  can  take  place  only  between 
the  limits  of  twenty  and  sixty  pounds  of  salt  for  one  of  tea. 
At  anything  under  twenty,  B  will  not  exchange ;  at  anything 
over  sixty,  A  will  not  exchange.  The  lower  and  higher  offers 
originally  made  by  each  are  excluded  by  the  desire  of  each 


§  96]  Rate  of  Exchange.  227 

to  come  to  terms.  Only  between  the  limits  of  twenty  and 
sixty  will  an  exchange  be  profitable  to  both. 

The  question  still  remains  :  what  will  be  the  exact  rate  be- 
tween these  limits?  In  pure  theory  there  must  be  a  point 
between  twenty  and  sixty  where  the  gain  of  both  in  surplus 
enjoyment  is  at  a  maximum.  The  location  of  that  point  de- 
pends on  the  comparative  desire  of  each  for  both  commodities. 
If  A  prefers  tea  to  salt  much  more  than  B  does,  the  exchange 
will  be  made  at  a  figure  close  to  sixty ;  for  even  though  A 
offers  only  twenty  or  thirty  for  one,  his  anxiety  to  get  more  tea 
will  be  greater  than  B's  desire  to  get  the  salt  at  that  rate,  and 
will  lead  him  to  increase  the  offer.  With  every  increase  in 
the  rate,  A's  desire  for  more  tea  will  fall,  and  B's  desire  for 
more  salt  will  rise ;  but  as  A's  original  desire  is  much  greater 
than  B's,  the  point  at  which  the  relative  desires  become  equal 
must  be  one  comparatively  favorable  to  B,  that  is,  near  sixty. 
If,  on  the  other  hand,  A  prefers  tea  to  salt  only  slightly  more 
than  B  does,  the  rate  will  be  nearer  twenty.  Whatever  the 
relative  preference,  there  is  a  point  which  gives  both  a  total 
maximum  benefit. 

This  is  strictly  true,  however,  only  of  divisible  commodities 
or  articles  sold  in  stocks,  where  any  unit  possesses  a  propor- 
tionate value  of  the  whole.  Where  there  is  no  stock,  or  where 
the  commodity  cannot  be  divided  without  some  loss  of  value, 
such  an  exact  point  between  the  limits  may  not  be  found. 
The  relative  desires  of  A  and  B  changed  because  of  the 
minute  alterations  in  the  supply  of  each  commodity.  But  if 
the  tea  and  salt  were  in  ten-pound  bags,  or  if  A  and  B  were 
exchanging  hens  and  pigs,  the  units  could  not  be  divided,  and 
it  might  happen  that  at  least  one  party  would  get  either  a  little 
more  or  a  little  less  than  he  anticipated. 

Even  with  divisible  commodities,  however,  the  theory  as- 
sumes that  equal  knowledge,  equal  opportunity  and  equal 
capacity  are  found  on  both  sides.  When  these  conditions  are 
lacking,  as  is  usually  the  case  in  such  an  isolated  transaction, 
the  actual  rate  of  exchange  will  depend  largely  on  the  superior 


228  Market  Value.  [§  97 

shrewdness  or  good  fortune  of  the  one  party  in  gauging  the 
strength  of  the  other.  If  A  can  conceal  his  intentions  better, 
the  rate  will  be  favorable  to  him;  if  B  can  "  bluff"  better,  it 
will  be  the  reverse.  The  keener  and  more  adroit  trader  will 
make  the  greater  gain.  In  practice,  therefore,  the  rate  of 
exchange  will  usually  be  at  almost  any  point  between  twenty 

and  sixty. 

97.     One  Seller  and  One  Buyer. 

Let  us  now  go  a  step  further  and  suppose  that  both  parties 
are  acquainted  with  the  use  of  money,  and  that  A  has  money 
instead  of  salt,  while  B  is  willing  to  give  up  his  tea  for  cash 
instead  of  salt.  In  other  words,  A  wants  to  buy  tea  and  B  to 
sell  it.  Instead  of  barter  we  now  have  purchase  and  sale. 
Substituting  a  cent  of  money  for  a  pound  of  salt,  A  offers  as 
before  ten  cents  (instead  of  ten  pounds  of  salt)  for  a  pound  of 
tea,  and  B  says  that  he  will  take  not  less  than  seventy  cents. 

If  the  desire  of  A  and  B  for  money  is  as  different  as  was  their 
desire  in  the  preceding  case  for  salt,  the  problem  will  be  pre- 
cisely the  same.  This  is  sometimes  true  in  actual  life.  A  dollar 
is  worth  more  to  a  poor  man  than  to  a  rich  man,  —  its  marginal 
utility  is  greater.  A  physician  will  charge  a  wealthy  patient  for 
an  operation  far  more  than  a  man  in  modest  circumstances. 
The  price  of  an  old  master  or  a  mediaeval  missal  will  often 
depend  largely  on  the  wealth  of  the  purchaser.  But  in  the 
ordinary  transactions  of  life,  where  we  deal  in  masses  of  com- 
modities, and  where  the  sum  devoted  to  the  purchase  is  only 
a  fraction  of  the  purchaser's  wealth,  this  difference  in  the 
worth  of  money  may  be  neglected.  Prices  on  the  produce 
exchanges  for  cotton  or  wheat  are  rarely  affected  by  the  fact 
that  some  of  the  dealers  are  richer  than  others.  The  great 
advantage  of  the  use  of  money  is  that  in  ordinary  transactions 
its  marginal  utility  to  both  parties  may  be  deemed  the  same. 

The  problem  is  therefore  simplified.     The  rate  of  exchange' 
was  so  arbitrary,  because  as  A  and  B  got  more  or  less  of  salt 
as  compared  with  tea,  the  marginal  utilities  of  each  commod- 
ity varied.     But  now  since  A  and  B  desire  to  buy  or  to  sell 


§  97]  One  Seller  and  One  Buyer.  229 

tea  only,  and  as  we  assume  that  the  value  of  money  remains 
constant,  the  price  that  each  is  willing  to  pay  depends  only  on 
their  relative  demand  for  tea.  In  technical  language,  the 
rate  of  exchange  is,  as  before,  conditioned  by  the  disparity  in 
the  marginal  utilities  of  the  two  commodities ;  but  since  the 
disparity  due  to  the  changes  in  the  utility  of  money  to  each 
is  now  negligible,  the  total  disparity  is  less  than  before.  If,  as 
is  possible,  this  relative  demand  of  A  and  B  for  salt  in  the 
original  illustration  was  responsible  for  a  variation  of  ten  points 
in  each  case,  the  limits  within  which  a  pound  of  tea  will  now 
change  hands  are  reduced  from  the  original  figures  of  twenty 
and  sixty  (pounds  of  salt)  for  one  of  tea,  to  thirty  and  fifty 
(cents)  for  one  pound  of  tea.  That  is,  if  we  neglect  the  va- 
riations due  to  difference  in  the  marginal  utility  of  money,  the 
price  of  a  pound  of  tea  will  be  somewhere  between  thirty  and 
fifty  cents.  Within  these  limits  it  will  still  be  arbitrary,  where 
A  and  B  are  the  only  buyer  and  seller. 

The  cases  thus  far  discussed  are  not  typical  of  ordinary  busi- 
ness transactions.  People  no  longer  barter  with  each  other, 
nor  does  it  often  happen  that  there  is  only  a  single  buyer  and 
a  single  seller.  An  example  would  be  the  agent  of  a  collector 
of  curios  meeting  a  farmer  who  is  persuaded  into  selling  an 
old  piece  of  furniture.  Ordinarily,  however,  there  will  be 
either  a  number  of  buyers  or  a  number  of  sellers,  —  and  often 
of  both  buyers  and  sellers.  In  such  cases  we  speak  of  compe- 
tition, because  sellers  and  buyers  compete  with  each  other  to 
secure  the  most  favorable  terms  for  themselves.  When  we 
use  the  term  competition  we  usually  mean  mutual  competition, 
/.  e.  competition  on  both  sides.  In  the  case  of  one  seller  and 
several  buyers,  we  speak  of  monopoly ;  we  neglect  the  com- 
petition because  it  is  only  one-sided,  —  between  the  buyers. 
There  may  also  be  the  reverse  kind  of  one-sided  competition, 
as  when  several  sellers  deal  with  only  one  buyer.  This  is  some- 
times called  "  buyer's  monopoly,"  —  an  expression  which  is  clear 
enough,  although  etymologically  not  quite  exact,  as  the  term 
monopoly  literally  implies  "  one-seller  "  and  not  "  one-buyer." 


230  Market  Value.  [§  98 


98.   One   Seller  and   Several  Buyers,  or   One  Buyer  and 
Several  Sellers  —  Monopoly. 

Let  us  now  take  the  case  where  several  A's  desire  to  pur- 
chase tea  from  the  monopolist  tea-dealer.  A,  as  we  have  seen, 
will  not  give  at  the  outside  more  than  50  cents;  suppose  that 
the  limit  of  A1  is  48  cents,  of  A2  45  cents,  and  of  A3  38 
cents.  If  A3  were  the  only  buyer,  the  price  could  not  rise 
above  38  cents,  and  might  be  much  below  it.  But  now 
appears  A2,  who  is  willing  to  go  as  high  as  45  cents.  If  each 
buyer  is  ready  to  take  B's  whole  stock,  it  is  plain  that  com- 
petition between  A2  and  A3  will  drive  the  price  above  38  cents, 
whereupon  A3  will  fall  out.  The  rate  of  exchange  can  there- 
fore fluctuate  only  between  38  cents  and  45  cents.  If  A1  now 
steps  in  and  is  ready  to  buy  the  whole  stock,  A2  will  be  shut 
out  and  the  price  will  fluctuate  between  45  cents  and  48  cents. 
Finally,  if  A  appears,  A1  will  be  excluded  and  the  price  will 
fluctuate  between  48  cents  and  50  cents.  In  other  words, 
when  we  have  competition  between  the  buyers,  the  rate  of 
exchange  is  limited  above  by  the  highest  offer  made  by  the 
buyer  to  whom  the  rate  is  most  unfavorable  (the  5o-cent  rate 
of  A),  and  below  by  the  highest  offer  of  the  buyer  next  on  the 
scale  (the  48-cent  rate  of  A1).  Thus  the  arbitrariness  of  the 
rate  of  exchange  is  limited. 

There  are  two  methods  by  which  this  result  can  be  reached. 
In  an  ordinary  auction  sale,  the  monopolist  seller  asks  for  the 
lowest  offer  for  the  whole  supply ;  but  even  here  there  is  often 
an  upset  price,  that  is,  a  price  below  which  the  seller  will  en- 
tertain no  bids  at  all.  That  represents  the  3o-cent  limit  of  B. 
With  each  increase  in  the  bid,  some  of  the  would-be  buyers 
fall  out,  until  finally  A1  stops  at  48  cents.  At  an  auction  A 
will  then  get  the  tea  for  48  cents ;  if  it  were  an  open  sale  on 
the  market,  and  if  B  were  not  willing  to  sell  at  that  figure,  A 
might  go  as  high  as  50  cents.  On  the  other  hand,  when  a 
municipal  government  offers  to  sell  bonds,  each  of  the  would- 
be  purchasers,  all  of  whom  must  submit  their  bids  at  the  same 


§  98]        One  Seller  and  Several  Buyers.         231 

time  in  writing,  naturally  offers  the  highest  price  at  which  he 
'  thinks  he  can  distance  his  competitors  and  yet  make  a  profit 
for  himself.  Here  buyers  who  offer  to  take  the  entire  issue 
are  often  given  the  preference,  and  each  is  driven  to  his  maxi- 
mum limit,  not  by  the  actual  rising  bids  of  his  predecessors, 
but  by  his  fear  of  their  competition.  This  is  sometimes  called 
the  Dutch-auction  system,  but  it  occurs  in  certain  transactions 
in  the  United  States  and  other  countries  as  well. 

What  has  been  said  is  equally  true,  mutatis  mutandis,  of  the 
case  of  one  buyer  and  several  sellers.  Suppose  that  several 
tea-planters,  B's,  desired  to  sell  their  crop  to  a  wholesale  mer- 
chant, A,  who  has  in  some  way  monopolized  the  business  of 
supplying  the  retail  dealers.  A,  as  before,  will  not  pay  more 
than  50  cents,  but  B8  is  willing  to  sell  at  38  cents.  Now 
comes  B2,  who  says  he  will  accept  an  offer  of  34  cents ;  B3  is 
evidently  shut  out  and  the  price  will  fluctuate  between  34  and 
38  cents.  If  B1  is  ready  to  sell  at  31  cents,  B2  will  be  shut 
out  and  the  rate  will  fluctuate  between  34  and  31  cents;  if  B 
finally  enters  the  market,  B1  is  excluded,  and  the  limits  of 
sale  will  be  between  30  and  31  cents. 

Such  cases  are  much  rarer  than  the  preceding.  For  it  is 
more  difficult  in  practice  to  monopolize  the  demand  for  an 
article  than  it  is  to  monopolize  the  supply.  Yet  instances 
will  readily  occur,  as  where  tenders  are  invited  from  several 
persons  to  supply  a  definite  demand,  either  of  a  government 
office  for  articles  like  clothing  or  armor-plates,  or  of  a  private 
individual  for  the  construction  of  a  house  or  the  making  of  re- 
pairs of  any  kind.  The  person  inviting  the  tender  is  in  this 
transaction  a  monopolist  buyer,  and  each  of  the  rival  bidders 
now  hastens  to  make  his  lowest  offer  at  the  very  beginning  in 
order  to  forestall  his  competitor.  The  contract  goes  to  the 
lowest  bidder  for  the  whole  amount. 

In  what  has  preceded  we  have  assumed  for  the  sake  of  sim- 
plicity, that  each  of  the  buyers  is  ready  to  take  the  whole 
amount  offered,  or  vice  versa,  that  each  of  the  sellers  is  in  a 
position  to  offer  the  whole  amount  demanded.  Oftentimes, 


232  Market  Value.  [§  98 

however,  this  is  not  true.  In  the"  ordinary  case  of  monopoly 
sales,  competing  buyers  are  usually  ready  to  take  only  a  part  of 
the  stock.  It  is  instructive  to  study -what  the  results  are  under 
such  conditions. 

Suppose  that  the  four  A's  desire  different  quantities  of 
tea.  A,  let  us  say,  desires  400  Ibs.  and  is  willing  to  pay  up  to 
50  cents  a  pound  for  the  first  hundred  pounds  if  he  cannot 
get  any  more,  48  cents  for  the  second  hundred,  45  cents  for 
the  third  and  38  cents  for  the  fourth ;  A1  desires  300  Ibs.  and 
is  ready  to  pay  not  more  than  48  cents  for  the  first  hundred, 
45  cents  for  the  second  and  38  for  the  third ;  A2  wishes  200 
Ibs.  and  will  go  to  45  cents  for  the  first  hundred  and  38  cents 
for  the  second  ;  finally,  A3  wants  100  Ibs.  and  will  give  38 
cents  a  pound.  Now,  if  B  has  only  100  Ibs.,  /.  e.  if  each  of  the 
buyers  bids  for  the  whole  stock,  we  have  seen  that  A  will  force 
the  price  up  to  48  cents,  and  may  even  go  up  to  50  cents.  A 
will  thus  secure  the  entire  supply.  If.  however,  B  has  more 
than  100  Ibs.  to  sell,  some  of  the  buyers  (A3)  will  not  bid 
for  the  total  amount.  As  a  consequence  both  the  price  and 
the  quantities  which  each  purchaser  secures  will  vary.  Sup- 
pose that  B  has  300  Ibs.  A  and  A1  between  them  will  bid 
the  price  up  to  45  cents  in  order  to  exclude  A2,  and  the  price 
will  vary  from  45  cents  to  48  cents.  At  any  such  price  A  will 
not  get  more  than  200  Ibs.,  for  although  he  is  willing  to  pay  up 
to  48  cents  for  his  second  hundred,  he  finds  that  A  is  ready  to 
pay  just  as  much  for  what  is  his  first  hundred  ;  and  while  A  is 
willing  to  give  up  to  45  cents  for  his  third  hundred,  A1  is  ready 
to  pay  as  much  for  his  second  hundred.  A  cannot  escape  the 
competition  of  A1  except  as  to  100  Ibs.  The  result  is  that  the 
price  for  the  whole  300  Ibs.  must  be  the  same  to  both,  that  is, 
at  some  point  between  45  cents  and  48  cents,  and  that  A  will 
get  200  Ibs.  and  A1  100  Ibs.  at  that  price. 

If  B  has  600  Ibs.,  it  can  be  shown  by  the  same  reasoning 
that  the  price  must  be  between  38  cents  and  45  cents,  and 
that  A  will  get  300,  A1,  200,  and  A2,  TOO  Ibs.  The  price  can- 
not fall  below  38  cents,  for  otherwise  A3  would  get  some  tea, 


§  99]  Several  Sellers  and  Buyers.  233 

—  a  condition  which  all  the  others  are  interested  in  pre- 
venting, as  they  know  that  there  is  not  enough  to  go  around. 
But  although  A8  is  shut  out,  A2  cannot  get  more  than  100  Ibs., 
because  if  there  were  any  danger  of  his  doing  so,  A1  and  A 
would  fear  to  lose  some  of  their  share  and  bid  the  price  up 
above  45  cents,  which  A2  cannot  afford.  For  the  same  reason 
A1  cannot  get  more  than  200  Ibs.,  for  A  would  then  bid  the  price 
above  45  cents,  which  A1  cannot  afford  for  his  second  hundred ; 
and,  finally,  A  cannot  get  more  than  300  Ibs.,  for  he  would 
have  to  exclude  A1  by  offering  more  than  45  cents,  which  A 
cannot  afford  for  his  third  hundred. 

Thus  in  all  such  cases  the  rate  of  exchange  will  vary  be- 
tween 38  cents  and  50  cents,  according  to  the  relative  demand 
of  each  of  the  buyers.  By  the  same  reasoning  it  might  be 
shown  that  where  we  have  one  buyer  and  several  sellers  the 
rate  would  vary  from  30  cents  to  38  cents.  In  each  case  of 
such  one-sided  competition  the  arbitrariness  of  the  rate  will  be 
less  than  where  there  is  no  competition  at  all. 

99.  Several  Sellers  and  Several  Buyers  —  Competition. 

We  now  come  to  the  final  case,  so  generally  found  in  actual 
life,  where  there  are  at  the  same  time  several  buyers  and 
several  sellers,  that  is,  where  there  is  competition  on  both  sides. 
They  all  meet,  either  in  person  or  through  agents,  on  the  tea 
exchange.  Each  buyer  desires  to  purchase  a  certain  quantity 
of  tea,  but  all  the  buyers  together  are  ready  to  take  more  than 
is  offered,  provided  they  can  get  a  satisfactory  price ;  each 
seller  wishes  to  dispose  of  a  certain  quantity,  but  all  the  sellers 
together  would  be  ready  to  sell  more  than  there  is  a  demand 
for,  provided  they  can  get  a  satisfactory  price.  In  other  words, 
each  desires  to  do  as  much  business  as  he  possibly  can  with 
profit.  Under  such  conditions  the  market  price  of  the  tea 
must  be  38  cents,  not  more  and  not  less.  There  will  be  no 
variation  at  all. 

For  if  the  price  fell  to  37  cents  some  of  the  sellers  (repre- 
sented by  B3)  could  not  afford  to  sell,  and  with  the  shortage 


234  Market  Value.  [§  100 

in  the  supply  all  the  buyers  together  could  not  get  as  much  as 
they  want ;  they  would  therefore  bid  against  each  other,  in  the 
fear  of  not  getting  enough,  and  the  price  would  rise.  It  could, 
however,  not  go  above  38  cents,  for  if  it  were  driven  say  to  39 
cents,  some  of  the  buyers  (those  represented  by  A3)  could  not 
afford  to  buy.  With  the  falling  off  in  the  demand,  each  of  the 
sellers  would  fear  to  be  the  unlucky  one  who  failed  to  dispose 
of  his  stock ;  the  sellers  (B's)  would  therefore  vie  with  each 
other  in  reducing  the  price  until  it  fell  to  38  cents. 

Thus  we  see  that  while  in  the  case  of  one  buyer  and  one 
seller  the  rate  of  exchange  is  arbitrary  (between  30  cents  and 
50  cents),  in  the  case  of  competition  on  either  side  the  lim- 
its of  variation  are  reduced  (between  30  cents  and  38  cents, 
or  38  cents  and  50  cents  respectively),  and  in  the  case  of 
competition  on  both  sides,  the  limits  meet,  that  is,  the  arbi- 
trariness disappears  and  the  rate  of  exchange  is  fixed  (at  38 
cents). 

100.  Conclusions. 

From  the  above  analysis  follow  certain  important  conclusions  : 
(i)  Under  free  competition  there  can  be  at  a  given  time 
and  place  only  a  single  price  for  the  same  commodity.  The 
price  of  tea  must  be  38  cents  to  all ;  if  it  were  less  or  more, 
the  pressure  of  the  competing  buyers  or  sellers  would  at  once 
operate  to  bring  it  back  to-  that  point.  The  exceptions  to  the 
rule  are  only  seeming.  It  may  happen,  for  example,  that  on 
an  exciting  day  on  the  stock  exchange,  when  there  are  violent 
fluctuations  in  the  market,  the  same  securities  may  be  sold  at 
the  same  time  in  two  different  groups  at  different  prices.  Here, 
however,  there  is  no  perfect  competition  ;  there  are  really  two 
separate  markets,  the  members  of  which  have  no  direct  con- 
nection with  each  other.  As  soon  as  the  excitement  dies  away 
and  the  groups  of  buyers  and  sellers  coalesce,  the  market  be- 
comes a  unit,  competition  is  again  perfect  and  the  price  is  the 
same  throughout.  In  the  same  way  a  firm  may  do  both  a  retail 
and  a  wholesale  business,  and  sell  the  same  article  for  different 


§  roc]  Conclusions.  235 

prices;  but  plainly  there  are  two  separate  markets.  Again, 
some  purchasers  have  to  pay  more  because  their  credit  is  not 
good ;  but  there  is  no  perfect  competition,  because  the  buyers 
are  really  offering  different  things  in  exchange.  Finally,  some 
sellers  may  ask  less  because  they  are  ignorant  of  the  market 
conditions,  or  may  grant  lower  rates  to  large  purchasers  be- 
cause the  transactions  are  secret.  In  no  instance  where  there 
is  a  perfect  competition  can  there  be  more  than  one  price  for 
the  same  thing  at  the  same  time. 

When  competition  is  absent  on  one  side,  that  is,  in  the  case  of 
monopoly,  this  principle  does  not  apply.  Since  the  object  of 
the  monopolist  is  to  make  the  greatest  possible  net  profits,  it  is 
to  his  interest  to  sell  each  increment  of  his  supply  at  the  highest 
possible  price.  If  we  refer  to  the  example  above  (p.  232),  it 
will  always  be  to  the  interest  of  the  monopolist  tea-dealer  who 
has  a  stock  of  300  Ibs.  to  sell  100  Ibs.  to  A  at  a  price  over  48 
cents,  and  the  other  200  Ibs.  to  A  and  A1  at  a  price  be- 
tween 45  cents  and  48  cents,  rather  than  to  sell  the  300  Ibs. 
at  the  lower  price.  The  monopolist  will  not  generally  be  able 
to  do  this,  for  he  may  be  selling  in  a  market  where  he  must 
seek  to  dispose  of  his  whole  stock  without  perfect  knowledge 
as  to  the  conditions  of  the  consumers.  Wherever  he  can,  how- 
ever, he  will  make  different  prices  to  different  persons,  and  if 
possible  will  even  sell  different  increments  of  the  supply  at 
different  prices  to  the  same  persom  Thus  not  only  does  the 
Standard  Oil  Company  find  it  profitable  to  charge  different 
prices  for  its  oil,  but  the  makers  of  particular  brands  of  soap 
or  chocolate,  which  give  them  to  that  extent  a  monopoly,  are 
in  the  habit  of  putting  the  same  soap  or  chocolate  into  differ- 
ent packages  and  selling  them  at  different  prices,  in  the  ex- 
pectation that  different  grades  of  purchasers  will  be  attracted. 
Under  competition  this  would  be  impossible. 

(2)  In  the  case  of  competition  the  market  price  is  always 
the  one  at  which  the  greatest  number  of  exchanges  can  be 
effected.  If  the  price  fell  below  38  cents,  some  of  the  sellers 
could  not  dispose  of  their  tea  ;  if  the  price  rose  above  38  cents, 


236  Market  Value.  [§  100 

some  of  the  buyers  would  be  unable  to  secure  tea.  In  either 
case  some  would  go  unsatisfied.  When  the  determination 
of  the  market  price  is  left  to  a  superior  authority,  as  on 
the  Berlin  stock  exchange,  we  have  a  good  illustration  of 
the  principle.  There  the  bids  and  offers,  in  writing,  are  so 
adjusted  by  a  committee  that  although  no  one  pays  more 
or  receives  less  than  he  intended,  some  may  pay  less  or 
receive  a  higher  price  for  such  quantities  as  are  needed  to 
balance  the  transaction,  with  the  result  that  some  bids  or 
offers  which  would  otherwise  have  been  excluded  are  finally 
accepted. 

In  the  case  of  monopoly  the  principle  does  not  apply. 
Since  the  monopolist  controls  the  supply,  he  may  secure  a 
greater  net  return  by  selling  a  smaller  quantity  at  higher  prices 
rather  than  a  larger  quantity  at  lower  prices.  The  exact  point 
at  which  he  can  sell  the  largest  quantity  at  the  greatest  profit 
depends  on  the  rapidity  with  which  the  scale  of  demand  in- 
creases as  the  supply  falls  off.  If  the  monopolist  is  in  posses- 
sion of  600  Ibs.  of  tea,  the  entire  stock  in  the  market,  whether 
he  sells  600  Ibs.  for  50  cents  or  500  Ibs.  for  60  cents,  will 
be  immaterial  to  him.  But  if  he  finds  that  by  his  offering  only 
500  Ibs.  the  price  will  rise  to  65  cents,  he  will  naturally  offer 
only  this  quantity,  and  destroy  the  other  100  Ibs.  In  the  case 
of  competition  he  would  not  dare  to  do  this,  because  his  com- 
petitors would  continue  to  supply  the  market  at  approximately 
the  old  price  ;  and  he  would  be  compelled  to  accept  this  price 
for  his  reduced  quantity.  Had  the  Dutch  East  India  Com- 
pany not  possessed  a  monopoly,  it  would  not  have  destroyed  a 
part  of  its  stock  of  spices  in  order  to  secure  greater  profits 
from  the  sale  of  what  remained.  When  some  of  the  misguided 
Alabama  planters  burned  a  part  of  the  cotton  crop  in  1904  in 
order  to  raise  the  price  of  the  remainder,  it  was  on  the  assump- 
tion that  every  other  planter  would  burn  his  proportionate 
share,  —  an  assumption  as  rash  as  it  proved  to  be  unfounded. 

(3)  If  by  demand  price  we  denote  the  price  offered  by  the 
buyers,  and  by  supply  price  the  price  asked  by  the  sellers,  the 


§  zoo]  Conclusions.  237 

marginal  demand  price  is  the  lowest,  as  the  marginal  supply 
price  is  the  highest,  price  that  is  actually  accepted.  The 
market  price  must  always  be  the  price  where  the  marginal 
demand  and  marginal  supply  prices  meet.  The  market  price 
is  therefore  in  cases  of  competition  always  the  marginal  price. 
In  the  example  given  above  the  marginal  purchaser  is  A8;  the 
marginal  seller  is  B8.  A8  's  marginal  offer  to  purchase,  /.  e. 
his  demand  price,  is  38  cents ;  B8  's  marginal  offer  to  sell, 
/.  <?.  his  supply  price,  is  38  cents.  If  A8  was  originally  will- 
ing to  go  as  high  as  39  cents,  while  B3  was  ready  to  sell  at  38 
cents,  these  would  not  be  final  marginal  figures ;  for  either 
there  would  be  an  A4  not  willing  to  go  quite  so  high  and  a  B4 
demanding  a  little  higher  price  ;  or  A8  would  not  give  as  much 
as  39  cents  for  a  further  increment,  and  B3  would  not  be  willing 
to  let  a  further  increment  go  for  as  little  as  38  cents.  There 
would  inevitably  be  some  point  between  38  cents  and  39  cents 
where  the  mutual  competition  of  the  A's  and  B's  would  meet, 
and  which  would  mark  the  marginal  offers  of  A8  and  B8 
respectively. 

The  difference  between  the  actual  market  price  and  the  non- 
marginal  offers  represents  the  surplus.  In  the  case  of  the  sellers 
who  get  the  money,  the  surplus  is  called  a  profit ;  in  the  case 
of  the  buyers  who  get  the  tea,  the  surplus  is  a  consumer's  sur- 
plus if  they  drink  the  tea,  or  a  profit  if  they  sell  the  tea.  B3, 
who  sells  the  tea  for  38  cents,  makes  no  profit.  His  offer  to 
sell  for  38  cents  is  the  marginal  offer,  because  at  that  point  he 
ceases  to  have  any  inducement  to  exchange.  But  B2  would 
have  been  willing  to  take  34  cents,  and  therefore  makes  4  cents 
a  pound  profit;  B1,  whose  limit  was  31  cents,  gains  7  cents; 
and  B  with  a  limit  of  30  cents  gains  8  cents,  On  the  other 
hand,  A,  who  buys  the  tea  for  38  cents,  would  have  been  willing 
to  go  to  50  cents.  If  he  drinks  the  tea,  this  difference  of  12 
cents  represents  a  surplus  satisfaction  to  him ;  if  he  was  willing 
to  give  50  cents  because  he  knew  he  could  sell  it  for  that,  the 
12  cents  represent  his  profit.  A1,  whose  limit  was  48  cents, 
secures  10  cents  surplus,  A2  with  a  limit  of  45  cents  gets  7 


238 


Market  Value.  [§  100 


cents  surplus,  while  A3,  whose  limit,  38  cents,  is  equal  to  the 
price,  enjoys  no  surplus  at  all. 

The  marginal  buyers  and  sellers  ('those  who  fix  the  price) 
thus  neither  make  nor  lose ;  there  will  be  nobody  beyond  the 
margin  because  he  would  lose ;  while  all  those  within  the  mar- 
gin —  the  intramarginal  buyers  and  sellers  —  make  a  gain, 
measured  either  in  money  or  in  enjoyment.  The  gain  — 
whether  profit  or  consumer's  surplus  —  has,  however,  no  effect 
on  the  price. 

In  the  case  of  monopoly  there  is  generally  no  marginal 
price,  because  there  is  only  one  seller  or  one  buyer  respec- 
tively. In  the  ordinary  case  of  one  seller  there  are  indeed 
many  buyers,  one  of  whom  makes  a  marginal  offer  or  demand 
price,  while  the  intramarginal  buyers  gain.  But  as  the  seller 
has  control  of  the  supply,  there  is  only  one  supply  price,  — 
no  higher  or  lower  supply  prices,  and  therefore  no  marginal 
supply  price.  It  is  barely  conceivable  that  the  relative  state 
of  demand  and  supply  is  such  that  the  seller  is  compelled,  in 
order  to  dispose  of  anything  at  all,  to  reduce  his  price  to  a 
figure  so  low  that  even  the  least  anxious  purchaser  can  get 
what  he  wants  at  his  own  valuation.  In  such  a  case  the 
monopolist  makes  no  gain  ;  his  supply  price  would  be  the 
marginal  demand  price.  But,  except  in  this  almost  impossible 
case,  the  monopolist  will  be  able  to  charge  more,  and  the 
market  price  will  not  be  the  marginal  price.  Market  price  is 
always  the  price  at  which  the  demand  price  and  the  supply 
price  meet  each  other;  in  all  but  the  most  exceptional  cases 
monopoly  market  price  is  not  a  marginal  price. 


CHAPTER   XVI. 
DETERMINATION   OF   NORMAL  VALUE. 

101.  References. 

N.  G.  Pierson,  Principles  (1902),  part  i,  chs.  i,  vii;  A.  Marshall,  Prin- 
ciples (1898),  bk.  iv,  ch.  iii,  and  bk.  v,  chs.  iv-vii ;  E.  v.  Bohm  Bawerk, 
Positive  Theory  (1891),  bk.  iv,  ch.  vii,  and  Karl  Marx  and  the  Close  of  his 
System  (trans,  by  MacDonald,  1898) ;  F.  v.  Wieser,  Natural  Value  (1893), 
bk.  v;  M.  Pantaleoni,  Pure  Economics  (1898),  part  2,  ch.  iii;  J.  S.  Nichol- 
son, Principles  (1901),  bk.  iii,  ch.  v ;  J.  E.  Cairnes,  Leading  Principles 
(1874),  part  i,  ch.  iii;  T.  N.  Carver,  Distribution  (1904),  ch.  ii ;  F.  A. 
Fetter,  Principles  (1904),  ch.  viii;  A.  W.  Flux,  Principles  (1904),  chs.  iv, 
v;  A.  T.  Hadley,  Economics  (1896),  ch.  iii;  H.  Sidgwick,  Principles 
(1883),  bk.  ii,  ch.  ii;  J.  R.  Commons,  Distribution  of  Wealth  (1893), 
ch.  iii ;  H.  G.  Kittredge,  Utilization  of  Wastes  and  By- Products  in  Twelfth 
Census,  X,  725-748;  A.  C.  Whitaker,  History  and  Criticism  of  the  Labor 
Theory  of  Value  in  English  Political  Economy  in  Columbia  Studies,  XIX 
(1904). 

102.  Normal  Demand  —  Elasticity  of  Demand. 

In  the  discussion  of  market  value  we  studied  the  process  by 
which  the  temporary  demand  and  supply  balance  each  other. 
In  the  discussion  of  normal  value  we  must  consider  the  influ- 
ences which  affect  the  more  permanent  demand  and  supply. 
In  our  example  it  was  assumed  that  the  temporary  demand 
and  supply  were  such  that  tea  sold  for  38  cents.  The  question 
now  arises,  why  did  tea  sell  for  38  cents  rather  than  for  3 
cents?  The  study  of  normal  value  is  the  study  of  normal 
demand  and  of  normal  supply. 

Since  the  demand  for  a  commodity  means  the  quantity 
desired  at  a  given  price,  a  change  in  the  demand  may  take 
place  without  being  caused  by  any  change  in  the  price.  When 

239 


240  Normal  Value.  [§  102 

ostrich  feathers  went  out  of  fashion  a  few  years  ago,  the  de- 
mand fell  off  to  such  an  extent  that  prices  went  down  and 
production  was  curtailed.  The  supply  adjusted  itself  to  the 
smaller  demand  at  the  lower  price.  The  change  in  demand 
was,  in  last  analysis,  the  cause  of  the  change  in  price. 

Ordinarily,  however,  demand  is  affected  by  the  price.  We 
speak  of  demand  being  elastic  when  a  change  of  price  pro- 
duces a  marked  alteration  of  demand,  demand  falling  or  rising 
as  the  price  goes  up  or  down.  Every  commodity  has  its  own 
law  of  demand.  There  are  as  many  degrees  of  elasticity  of 
demand  as  there  are  variations  in  human  wants  and  the  ability 
of  men  to  satisfy  these  wants.  Demand  may  be  relatively 
inelastic  or  stiff,  either  in  the  sense  of  being  constant  or  in  the 
sense  that  it  will  be  completely  destroyed  by  any  increase  of 
price. 

(1)  The  best  example  of  inelastic  demand  in  the  first  sense 
is  salt.     A  fall  in  price  will  not  induce  us  to  eat  more ;  an  in- 
crease of  price  will  result  in  almost  no  falling  off  in  demand. 
Nevertheless  the  demand  is  not  completely  inelastic,  because 
if  the  price  rises  enough  the  poor  may  be  compelled  to  curtail 
its  use,  even  if  it  involves  disease  and  decimation.     Somewhat 
analogous  in  this  respect  to  necessities  are  high-priced  luxu- 
ries.    The  purchasers  of  pearls  are  not  quite  so  likely  to  be 
held  back  by  a  moderate  increase  of  price  as  would  be  the 
less  well-to-do  consumers  of  cheaper  commodities.     Yet  the 
demand  for  pearls  is  relatively  inelastic  only  at  one  end  of 
the  scale ;  even  a  slight  decrease  of  price  might  augment  the 
demand  considerably. 

(2)  The  other  case  of  inelastic  demand  may  be  illustrated 
by  oleomargarine.     If  the  price  were  to  rise  beyond  a  certain 
point,   the   demand  would   be   completely  destroyed,   and   it 
would  be  replaced  by  butter.     Even  here,  however,  the  de- 
mand is  inelastic  only  beyond  that  limit ;  within  it,  a  decrease 
of  price  means  an  increase  of  demand.    With  well-nigh  every 
commodity  the   demand   will  be  annihilated   if  the  price  is 
forced  high  enough. 


§  io2]  Elasticity  of  Demand.  241 

The  proper  statement,  then,  is  not  that  demand  is  quite 
inelastic,  but  that  every  commodity  has  its  own  relative  degree 
of  elasticity  of  demand.  The  demand  for  some  things  is  far 
more  expansible  than  for  others ;  a  fall  in  the  price  of  cotton 
will  mean  a  greater  increase  in  demand  than  a  proportionate 
fall  in  the  price  of  books. 

While  utility  lies  at  the  foundation  of  value,  some  commod- 
ities can  be  utilized  only  in  combination  with  others.  A  bow 
is  of  no  use  without  an  arrow ;  a  pen  is  worthless  without  ink. 
The  demand  for  such  complementary  goods  is  a  composite  or 
joint  demand  :  we  want  the  pen  and  the  ink  together,  we 
want  neither  of  them  separately ;  but  when  we  know  that  we 
can  get  the  one,  we  want  the  other.  The  demand  for  either 
of  two  complementary  goods  is  thus  an  indirect  or  derived  de- 
mand, and  the  elasticity  of  a  derived  demand  often  differs 
from  that  of  a  direct  demand. 

If  the  price  of  both  complementary  goods  rises,  the  demand 
for  each  will  normally  fall.  But  if  the  price  of  only  one  of  the 
complementary  goods  rises,  the  demand  for  it  will  not  fall  to 
the  same  extent.  If  both  ink  and  pens  rise  in  price,  more 
people  will  use  pencils.  But  if  the  price  of  ink  remains  the 
same,  the  price  of  pens  must  rise  far  higher  before  the  pur- 
chaser will  be  driven  to  accept  a  substitute.  The  demand  for 
one  of  two  complementary  goods  is  more  inelastic  than  the 
demand  for  a  commodity  which  possesses  independent  utility. 
Direct  demand  is  more  elastic  than  the  derived  demand  which 
flows  from  the  existence  of  joint  demand. 

In  modern  life  the  sphere  of  joint  demand  is  continually 
growing.  Production  is  becoming  more  complex,  and  the 
demand  for  most  goods  used  in  production  depends  more  and 
more  on  the  possibility  of  combining  them  with  others.  Con- 
sider the  numberless  things  that  go  to  make  up  a  steamship. 
Some  of  them  possess  a  direct  utility  for  other  purposes ;  but 
to  the  extent  that  their  value  largely  depends  on  the  demand 
of  shipbuilders,  most  of  them  may  be  considered  complemen- 
tary goods.  The  more  complex  our  productive  processes  and 

16 


242  Normal  Value.  [§  103 

the  more  refined  our  methods  of  consumption,  the  greater  is  the 
sphere  of  joint  demand,  and  the  more  striking  are  the  effects 
which  changes  in  demand  for  one  cornmodity  produce  on  the 
demand  for  others.  The  demand  for  bicycles  affected  the 
demand  for  horses ;  the  introduction  of  the  railway  revolu- 
tionized the  demand  for  coaches  and  for  country  inns.  The 
demand  for  any  commodity  is  in  one  sense  dependent  upon, 
or  derived  from,  the  demand  for  other  commodities. 

Whatever  the  nature  of  the  demand,  however,  whether 
direct  or  complementary,  whether  stiff  or  inelastic,  as  long 
as  there  is  any  permanent  demand  at  all,  there  will  be  an 
effort  on  the  part  of  society  to  fill  the  demand.  Inasmuch  as 
all  value  depends  on  the  relations  between  demand  and  supply, 
it  becomes  necessary  to  study  the  forces  which  influence  the 
permanent  supply. 

103.  Normal  Supply  —  Cost  of  Production. 

We  have  learned  above  (§  89)  that  valuable  things  may 
be  divided  into  four  classes,  namely,  human  services,  concrete 
commodities,  relations  and  privileges,  and  a  fund  of  capital  in 
general.  It  must  be  noted,  furthermore,  that  economic  goods 
are  also  divisible  into  goods  of  which  the  supply  cannot  be 
increased,  like  favored  sites  of  land,  waterfalls,  old  pictures 
and  coins,  or  unique  examples  of  anything;  and,  secondly, 
into  reproducible  goods. 

The  discussion  of  market  value  and  the  preceding  remarks 
on  normal  demand  apply  to  all  the  above  classes.  In  treating 
of  normal  supply,  however,  it  is  advisable  to  study  first  those 
concrete  things  which  can  be  duplicated.  The  great  mass  of 
commodities  can  be  increased  in  quantity,  and  the  progress  of 
society  depends  ultimately  on  this  increase.  We  shall  there- 
fore restrict  the  discussion  in  this  chapter  to  those  reprodu- 
cible commodities,  and  reserve  for  the  next  chapter  the  study 
not  only  of  those  concrete  goods  whose  quantity  is  fixed,  but 
also  of  the  other  embodiments  of  value. 

Sometimes  a  commodity  is  picked  up  by  chance,  as  when 


§  103]  Cost  of  Production.  243 

we  stumble  across  a  gem  or  an  unexpected  deposit  of  gold. 
Clearly,  however,  we  cannot  depend  on  such  accidental  finds 
for  a  permanent  supply ;  as  soon  as  we  search  for  them  we  are 
purposely  spending  time  and  labor  on  their  acquisition.  Since 
therefore  all  goods  whose  quantity  is  susceptible  of  increase 
are  acquired  (or,  in  technical  language,  produced)  by  efforts, 
they  cost  something  to  produce.  In  a  society  which  uses 
money  this  subjective  pain  cost  is  translated  into  a  money 
cost,  or  what  is  ordinarily  called  the  expenses  of  production. 
Hence  it  is  usually  stated  that  the  normal  supply  price  of 
commodities  —  that  is,  the  price  at  which  producers  in  the 
long  run  are  willing  to  sell  their  supply  —  depends  on  cost  of 
production. 

In  making  this  statement,  however,  we  must  be  careful  to 
define  both  branches  of  the  term  cost  of  production.  By 
production  we  do  not  mean  particular  production ;  by  cost  we 
do  not  mean  individual  cost. 

(1)  Cost  of  production  does  not  necessarily  mean  the  cost 
of  producing  the  particular  commodity  in  question.    The  labor 
expended  on  a  commodity  has  no  necessary  influence  on  its 
price.     A  yard  of  cotton  cloth   may  have  cost  twenty  cents  to 
produce ;  if  through  some  new  invention  the  same  cloth  can 
now  be  produced  for  ten  cents,  the  price  of  the  old  supply  will 
no  longer  be  twenty  cents.     It  is  evident,  then,  that  when  we 
speak  of  cost  of  production  we  mean  the  cost  of  continuous 
production  or  cost  of  reproduction.     If  cotton  cloth  can  be 
duplicated  or  continuously  produced  (/.  e.  reproduced)  for  ten 
cents  a  yard,  the  supply  price  will  remain  ten  cents.     It  is  only 
where  the  cost  is  a  constant  cost,  that  is,  where  cost  of  produc- 
tion is  equivalent  to  cost  of  continuous  production  or  repro- 
duction, that  the  supply  price  depends  on  the  cost  of  production. 
When  cost  of  production  and  cost  of  reproduction  diverge,  it 
is  only  the  latter  that  affects  value. 

(2)  Secondly,  cost  of  production  does  not  mean  individual 
cost.     Value,  as  we  know,  is  a  social  conception  ;  the  real  cost 
of  production  which  affects  value  is  the  socially  necessary  cost 


244  Normal  Value.  [§  103 

The  important  point  is  not  that  a  commodity  costs  the  producer 
something,  but  that  it  saves  the  consumer  something.  It  may 
save  one  consumer  more  than  ano-ther,  but  its  value  depends 
on  what  it  saves  the  social  group  as  a  whole.  This  saving  of 
social  cost  is  what  is  meant  by  socially  necessary  cost.  I  may 
spend  much  time  on  something  which  will  have  no  sale  because 
it  does  not  suit  the  social  demand.  The  commodity  will  then 
of  course  not  be  duplicated ;  there  will  be  no  cost  of  repro- 
duction. The  markets  are  full  of  such  examples  of  misdirected 
labor,  which  involve  the  producer  in  loss.  A  new  shirting,  for 
instance,  fails  to  strike  the  popular  fancy;  a  new  brand  of 
tobacco  attracts  no  notice.  If,  on  the  other  hand,  the  product 
fills  a  social  demand,  the  producers  will  adjust  their  output  and 
their  exertions  to  this  demand.  The  cost  to  the  individual 
producer  will  adjust  itself  to  the  socially  necessary  cost,  that  is, 
the  amount  which  the  purchasers  as  a  group  are  willing  to  give 
rather  than  make  the  article  themselves.  If  the  individuals 
cannot  reduce  their  cost,  they  will  stop  producing;  if  they 
reduce  their  cost  below  this  point,  the  point  itself  will  move. 
Society  will  not  be  willing  to  give  more,  because  what  the  pro- 
ducers can  do,  the  rest  of  society  can,  if  necessary,  do.  It  is 
in  this  way  that  an  equivalence  is  brought  about  between  indi- 
vidual and  social  cost ;  and  it  is  only  because  of  this  equivalence 
that  cost  of  production  may  be  said  to  influence  value. 

When  therefore  we  affirm  that  the  normal  supply  price 
depends  on  cost  of  production,  we  must  remember  that  we 
are  speaking  only  of  reproducible  goods,  and  that  the  state- 
ment is  true  only  in  the  sense,  first,  that  production  means  re- 
production, and,  secondly,  that  cost  means  socially  necessary 
cost,  —  not  pains  (or  their  money  equivalent)  taken,  but  pains 
saved.  When  individual  and  social  cost  diverge,  value  does 
not  depend  on  individual  cost  of  production ;  when  they  meet, 
value  may  be  expressed  in  terms  of  either.  It  is  only  because 
individual  cost  tends  to  adjust  itself  to  the  socially  necessary 
cost  that  we  can  roughly  speak  of  the  price  of  anything  de- 
pending on  its  cost  of  production. 


§  104]  Law  of  Marginal  Cost.  245 

104.   Law  of  Marginal  or  Maximum  Cost. 

The  term  cost  of  production  must  be  further  defined. 
Whenever  there  is  more  than  one  producer,  there  will  be  dif- 
ferent costs  of  production.  Producers  differ  in  ability  or  in 
opportunity.  While  all  similar  units  in  the  supply  sell  under 
competitive  conditions  at  the  same  price,  the  superior  skill  of 
some  employers  or  the  more  fortuitous  combination  of  other 
causes  enables  some  to  produce  more  cheaply  than  others.  If 
the  cheaper  producer  could  supply  the  whole  market,  he  would 
secure  a  monopoly.  But  while  all  producers  seek  to  sell  as 
much  as  they  can,  it  only  rarely  happens  that  any  one  can 
furnish  the  entire  supply.  Whenever  there  is  competition,  there 
are  different  costs  of  production. 

It  may  conceivably  happen,  indeed,  that  all  the  producers  at  a 
particular  moment  are  men  of  precisely  the  same  abilities  and 
subject  to  the  same  conditions.  In  this  possible  case  —  which 
is  apt  to  be  true  only  of  newly  started  industries  —  there  would 
indeed  be  only  one  identical  cost  for  all  units  of  the  supply. 
There  could  then,  however,  not  be  any  permanent  profits  to  all 
the  producers,  because  prices  could  not  permanently  remain 
above  the  mere  cost  of  production.  If  there  were  profits  to  all 
the  producers,  competition  would  surely  induce  one  of  them  to 
lower  the  price  in  the  hope  of  securing  larger  profits  through 
greater  sales ;  or  if  he  did  not  do  this,  some  new  producer 
would  enter  the  field  and  cut  prices.  The  only  way  in  which 
prices  could  be  permanently  kept  at  the  old  level  would  be 
through  some  control  of  the  supply.  We  should,  however,  then 
no  longer  have  free  competition,  but  should  be  in  the  presence 
of  some  form  of  monopoly.  Permanent  production  at  the  same 
cost  for  all  units  of  the  supply  almost  always  involves  some 
form  of  monopoly. 

Since,  therefore,  there  is  in  case  of  competition  no  uniform 
cost,  the  question  arises,  when  we  speak  of  prices  depending  on 
cost  of  production,  which  cost?  It  can  manifestly  not  be  the 
lowest  cost.  If  at  any  moment  there  are  five  firms  supplying 


246  Normal  Value.  [§  104 

the  entire  market  for  cotton  goods,  at  a  cost  to  each  of  six, 
seven,  eight,  nine  and  ten  cents  a  yard  respectively,  it  is  clear 
that  the  price  will  not  be  six  cents,'  for  all  except  the  six-cent 
producer  would  then  lose  money  and  stop.  Nor  can  the  price 
be  fixed  by  the  average  cost  of  production,  as  is  often  carelessly 
stated.  For  if  the  price  were  the  average  cost,  that  is,  eight 
cents,  the  nine  and  ten  cent  producers  would  lose  and  withdraw 
their  capital.  As  long  as  the  demand  is  large  enough  to  keep 
all  the  producers  in  business,  the  price  must  be  ten  cents,  — 
corresponding  to  the  greatest  or  maximum  cost.  It  cannot  be 
lower  than  ten  cents,  for  otherwise  the  ten-cent  producer  would 
step  out ;  it  cannot  be  higher  than  ten  cents,  because  in  their 
mutual  endeavor  to  capture  more  of  the  market  the  price  will 
be  kept  down  to  the  lowest  point  consistent  with  continuous 
production. 

This  maximum  cost  may  also  be  called  the  marginal  cost  of 
production,  because  the  ten-cent  producer  is  just  on  the  margin 
of  withdrawing.  He  neither  makes  nor  loses.  All  the  other 
producers  —  the  intramarginal  producers  —  earn  a  profit  rep- 
resented by  the  difference  between  the  cost  to  them  and  the 
selling  price.  The  six-cent  producer  makes  four  cents  on  each 
yard,  the  seven-cent  producer  three  cents,  and  so  on.  But  the 
ten-cent  producer  only  covers  expenses. 

If  we  could  conceive  of  society  in  a  state  of  rest,  with  no 
changes  in  population  or  fashion  or  supply  of  capital  or  tech- 
nique, this  condition  would  be  permanent.  The  marginal 
producer  would  just  barely  make  both  ends  meet,  but  would 
earn  nothing  above  his  cost.  But  although  society  is  never 
permanently  in  such  a  state,  the  condition  may  at  any  given 
period  be  said  to  be  realized.  At  every  season  when  goods 
are  thrown  on  the  market  the  seasonal  supply  may  be  deemed 
fixed.  The  cotton  prints  that  are  sold  this  year  were  made 
months  ago.  According  to  variations  of  demand  from  day  to 
day  the  market  price  will  change,  but  the  oscillations  during 
this  particular  season  will  move  about  a  central  point  of  normal 
price  which,  so  far  as  the  supply  for  that  season  is  concerned, 


§  105]  Law  of  Minimum  Cost.  247 

depends  upon  the  maximum  cost,  that  is,  the  cost  of  producing 
the  most  expensive  increment  in  the  actual  supply.  Whatever 
the  daily  fluctuations  of  market  price  may  be,  the  normal  price 
for  that  season  will  be  ten  cents  a  yard.  At  any  given  period, 
cost  of  production  means  maximum  or  most  expensive  cost. 

105.    Law  of  Minimum  Cost. 

The  normal  supply  price  just  discussed  is,  however,  not  the 
permanent  price  for  longer  periods.  Actual  business  condi- 
tions are  dynamic.  There  is  a  continual  movement  going  on 
in  the  forces  that  affect  supply.  The  cotton  prints  may  sell 
one  season  at  ten  cents,  but  next  season  the  more  efficient 
producer,  or  perhaps  some  new-comer  with  more  capital  or  with 
better  machines  or  with  the  chance  of  securing  cheaper  labor 
or  with  improved  facilities  for  marketing  the  product,  will 
endeavor  to  put  out  an  increased  supply  at  a  lower  cost.  This 
increase  of  supply  will  tend  to  depress  the  price,  and  although 
the  manufacturer's  percentage  of  profit  may  be  smaller  than  it 
would  have  been  at  the  old  price,  his  aggregate  profits  will  be 
enhanced  through  the  great  volume  of  sales. 

On  the  other  hand,  his  gains  will  be  at  the  expense  of  the 
less  efficient  producer  at  the  margin.  In  every  business  there 
are  always  some  who  are  able  just  to  make  both  ends  meet. 
Their  machinery  is  antiquated,  their  capital  has  been  depleted, 
their  business  activity  and  knowledge  are  no  longer  what  they 
should  be,  and  their  former  profits,  if  there  ever  were  any,  have 
now  vanished.  They  may  continue  for  a  time  to  struggle 
along,  hoping  against  hope,  and  may  live  on  their  capital,  being 
content  to  bridge  over  the  next  few  years  without  profit ;  or  if 
they  have  invested  heavily  in  unsalable  buildings  and  machin- 
ery, they  may  deceive  themselves  by  a  fallacious  system  of 
bookkeeping,  and  through  a  neglect  to  charge  up  the  item 
of  depreciation  of  stock  or  machinery,  may  figure  out  a  nomi- 
nal profit.  In  any  case,  however,  the  day  of  reckoning  is  sure 
to  come.  Sooner  or  later  the  producer  will  find  that  he  is 
not  making  money.  He  will  cease  producing  that  particular 


248  Normal  Value.  [§  105 

commodity,  and  his  place  will  be  taken  by  some  more  efficient 
producer. 

All  industrial  progress  consists  of  a-  perpetual  change  at  the 
top  and  at  the  bottom  of  the  line  of  producers.  Fresh  capital 
is  continually  coming  in,  the  discouraged  are  continually  step- 
ping out. 

It  is  plain,  then,  that  if  by  normal  value  we  mean  the  value 
to  which  prices  tend  in  the  long  run  to  conform,  normal  value 
under  conditions  of  progress  moves  in  the  direction  of  cost  of 
production  under  the  most  favorable,  not  under  the  least  favor- 
able, conditions.  It  tends  toward  lowest  cost,  not  highest  cost. 
In  the  cotton  industry,  for  instance,  a  new  man  enters  the  field 
who  can  produce  prints  somewhat  more  cheaply.  While  not 
able  to  supply  the  entire  market,  he  can  turn  out  such  large 
quantities  that  the  price  will  fall,  let  us  say,  to  nine  cents.  He 
is  willing  to  sell  at  that  figure,  because  he  expects  to  dispose 
not  only  of  his  share  of  the  greater  sales  due  to  lower  prices, 
but  also  of  a  proportion  of  the  goods  previously  sold  by  the 
ten-cent  producer,  who  now  drops  out.  Even  if  he  could  sup- 
ply the  whole  demand,  he  will  not  reduce  the  price  to  eight 
cents,  because,  although  this  would  again  increase  his  sales,  his 
competitors  —  the  six  and  seven  cent  producers  —  will  also 
sell  more,  and  he  will  not  be  able  to  sell  enough  more  to  com- 
pensate him  for  the  lower  price.  Under  such  conditions  the 
price  will  be  nine  cents,  and,  the  ten-cent  producer  having 
fallen  out,  the  nine-cent  producer  becomes  the  marginal  man. 

On  the  other  hand,  if  the  new  producer  finds  that  he  can 
produce  his  goods  at  a  lower  price  and  market  them  more 
successfully  than  his  competitors,  the  price  will  gradually  fall. 
With  every  decrease  in  price  the  old  marginal  producer  dis- 
appears, and  he  who  formerly  made  a  profit  now  becomes  the 
marginal  producer.  When  a  five-cent  or  a  four-cent  producer 
makes  his  appearance,  the  price  may  fall  to  six  cents,  and  the 
nine-cent,  eight-cent  and  seven-cent  producers  successively 
abandon  the  struggle,  until  the  six-cent  producer  now  becomes 
the  marginal  producer. 


§  io6]  Law  of  Varying  Cost.  249 

Thus  it  is  that  while  the  cost  of  production  on  which  sea- 
sonal or  short-time  normal  supply  price  depends  is  greatest 
or  maximurn  cost,  the  cost  of  production  which  influences 
permanent  normal  value  is  lowest  or  minimum  cost.  In  con- 
ditions of  change  the  marginal  or  maximum  cost  does  not  fix 
the  price,  but  is  fixed  by  the  price ;  the  price  does  not  fall  to 
nine  cents  because  the  nine-cent  man  becomes  the  marginal 
producer,  but  the  nine-cent  man  becomes  the  marginal  pro- 
ducer because  the  price  falls  to  nine  cents.  Hence,  while 
normal  value  is  at  any  given  moment  at  the  point  of  maximum 
cost,  it  is  under  conditions  of  progress  continually  moving  in 
the  direction  of  minimum  cost. 

106.    Elasticity  of  Supply  —  The  Law  of  Varying  Cost. 

Corresponding  to  the  elasticity  of  demand,  there  is  an  elas- 
ticity of  supply.  In  some  cases  where  no  additional  quantity 
can  be  secured  on  any  terms  the  supply  may  be  said  to  be 
completely  inelastic.  But  in  most  cases  the  supply  is  suscep- 
tible of  increase.  According  to  the  difficulties  involved  in 
procuring  this  new  supply  we  speak  of  the  relative  elasticity  of 
the  supply.  When  an  additional  amount  of  exertion  will  result 
in  a  proportionate  increase  of  output,  that  is,  when  double 
the  labor  will  double  the  supply,  we  speak  of  the  cost  being 
constant. 

Constant  cost,  then,  is  not  the  same  as  uniform  cost.  When 
we  say  that  a  commodity  is  produced  at  uniform  cost,  we  mean 
that  all  parts  of  the  supply  produced  at  a  given  time  cost  the 
same.  This  implies  that  there  is  only  one  producer.  For,  as 
we  have  seen,  as  soon  as  there  are  different  producers  we  have 
a  maximum  and  a  minimum  cost.  Uniform  cost  implies 
monopoly.  On  the  other  hand,  when  we  say  that  a  commodity 
is  produced  at  constant  cost,  we  mean  that  additional  quanti- 
ties will  cost  the  same.  This  applies  to  competition  and  to 
monopoly  alike.  If  it  costs  the  monopolist  ten  cents  to  pro- 
duce every  yard  of  cotton,  no  matter  "how  large  the  output,  the 
cost  is  both  uniform  and  constant.  If  the  ten- cent  producer 


250  Normal  Value.  [§  106 

competes  with  the  six  and  eight  cent  producers,  and  if  each  can 
double  his  output  by  the  application  of  double  the  amount  of 
capital,  the  cost  is  not  uniform,  but  'it  is  constant. 

In  many  cases  the  cost  of  production  is  not  constant,  be- 
cause the  supply  is  less  expansible  or  elastic.  When  each 
additional  increment  of  the  supply  costs  more  than  the  pre- 
ceding, we  speak  of  increasing  cost  or,  since  the  returns  from 
each  additional  application  of  energy  grow  smaller,  we  can 
equally  well  speak  of  diminishing  returns. 

In  one  sense  everything,  as  we  know  (§  88),  is  subject  to  the 
law  of  diminishing  returns.  While,  however,  the  law  of  dimin- 
ishing returns  or  increasing  cost  is  universal  in  the  sense  that 
it  applies  to  all  economic  goods  after  a  certain  point,  it  does 
not  necessarily  apply  before  that  point  has  been  reached.  The 
"certain  point"  is  the  point  of  full  utilization.  It  frequently 
happens  that  this  point  has  not  been  reached.  If  we  recur  to 
the  examples  on  page  213,  the  omnibus  may  run  only  half  full ; 
there  may  be  only  two  trains  a  day  when  there  might  equally 
well  be  a  dozen;  a  farmer  with  a  twenty- five- acre  tract  may 
have  a  family  so  large  that  he  would  more  than  double  his 
produce  if  he  had  a  fifty-acre  farm.  In  the  case  of  the  omnibus 
an  increase  of  business  will  not  increase  the  expense  at  all ;  in 
the  case  of  the  railroad  more  rolling  stock  and  employees  may 
be  needed,  but  new  bridges,  new  roadbed,  new  stations  and  new 
general  offices  may  not  be  required ;  in  the  case  of  the  farmer 
more  seed  and  perhaps  more  implements  will  be  used,  but  these 
may  constitute  only  a  minor  element  of  cost.  In  all  these 
cases  a  doubling  of  receipts  may  not  be  attended  by  a  doubling 
of  expense ;  the  expenses  will  increase,  but  not  so  fast  as  the 
income. 

Whenever  the  supply  is  more  elastic,  that  is,  whenever 
double  the  amount  of  exertion  yields  more  than  double  the 
output,  we  are  in  the  presence  of  the  law  of  increasing  returns 
or  decreasing  cost.  When  double  the  exertion  just  doubles  the 
output,  we  have  the  law  of  constant  returns  or  constant  cost. 
Up  to  the  point  of  full  utilization  the  returns  may  at  first  grow 


§  107]  Law  of  Joint  Cost.  251 

faster  than  the  cost  or  exertion,  and  may  then  keep  pace  with  it. 
In  every  business  enterprise  some  expenses  grow  with  every 
increase  of  business,  but  others  remain  the  same  up  to  a  given 
point.  Such  expenses  are  called  constant  as  opposed  to  varia- 
ble expenses.  Wherever  the  investment  of  capital  is  consider- 
able, the  proportion  of  constant  to  variable  expenses  is  apt  for 
a  time  to  be  large.  But  the  time  will  ultimately  expire.  When 
the  railroad  traffic  becomes  very  dense,  new  tracks,  heavier 
bridges,  larger  stations  must  be  provided,  and  the  law  of 
increasing  returns  loses  its  efficacy.  Sooner  or  later  the  law  of 
increasing  returns  will  be  supplanted  by  that  of  constant  re- 
turns, only  itself  finally  to  give  way  to  the  fundamental  law  of 
diminishing  returns. 

At  any  given  period,  however,  an  industry  may  be  subject 
to  any  one  of  the  three  laws.  The  question  whether  a  business 
follows  the  law  of  diminishing,  constant  or  increasing  cost  is  a 
question  of  fact  depending  upon  the  possibility  of  profitably 
employing  more  labor  or  capital,  that  is,  of  successfully  extend- 
ing the  point  of  intensive  or  extensive  utilization. 

107.  Law  of  Joint  Cost. 

Just  as  we  have  seen  that  there  is  a  joint  demand,  so  there 
is  a  joint  supply.  To  the  extent  that  supply  depends  on  cost, 
we  have  the  law  of  joint  cost.  In  many  cases  different  parts 
of  the  same  commodity  serve  different  uses  and  therefore  sell 
at  different  prices  :  the  staterooms  in  a  steamer,  the  seats  in  a 
theatre,  the  various  portions  of  an  animal  used  for  food,  appeal 
to  different  classes,  and  thus  sell  at  varying  prices.  The  nor- 
mal price  does  not  adjust  itself  to  the  cost  of  the  particular 
part,  because  there  is  no  such  separate  cost.  It  is  the  whole, 
not  the  parts,  to  which  we  can  assign  a  cost ;  and  this  cost  is 
the  joint  cost.  The  normal  price  of  all  the  parts  together 
adjusts  itself  to  the  joint  cost,  but  the  price  of  any  particular 
part  may  be  above  or  below  this  level. 

A  more  important  class  of  cases  is  represented  by  industries 
devoted  primarily  to  the  production  of  some  one  commodity, 


252  Normal  Value.  [§  107 

but  which  have  as  an  incidental  result  the  creation  of  a  by- 
product. Sometimes  this  by-product  is  only  the  refuse,  as 
in  the  case  of  the  mash  sold  by  the  whisky  distillers  or  the 
coke  sold  by  the  gas  companies.  Occasionally  the  by-product 
even  develops  into  the  chief  product.  The  refuse  of  to-day 
becomes  the  chief  source  of  profit  of  to-morrow.  There  is 
nothing  more  fascinating  in  the  annals  of  science  or  more  im- 
portant in  the  progress  of  wealth  than  the  story  of  the  modern 
utilization  of  wastes  and  by-products.  This  story,  in  its  appli- 
cation to  the  United  States  during  the  decade  1890—1900,  has 
been  told  by  Mr.  Kittredge  in  the  twelfth  census. 

Whenever  a  business  produces  more  than  one  kind  of  com- 
modity, we  have  something  analogous  to  by-products.  One  of 
the  greatest  difficulties  in  modern  enterprise  is  for  the  pro- 
ducer to  assign  to  each  unit  or  class  of  his  output  its  propor- 
tionate share  in  the  joint  cost.  In  the  case  of  railway  charges 
this  difficulty  is  at  its  maximum.  In  such  cases  the  price  of 
individual  product  may  bear  little  relation  to  its  own  cost, 
although  the  price  of  all  the  products  together  is  fixed  by 
joint  cost.  The  railway  charges  more  for  the  transport  of  a 
given  value  of  silk  than  for  that  of  an  equal  value  of  coal, 
although  the  cost  is  far  less.  Price  here  is  fixed  not  by  cost 
of  production  or  cost  of  service,  but  by  value  of  service.  The 
silk  is  so  much  more  expensive  than  coal  that  it  can  afford  to 
pay  a  higher  charge.  If  the  same  price  were  charged  for  coal 
as  for  silk,  coal  could  not  be  transported  at  all,  as  the  price 
would  be  prohibitive ;  and  as  long  as  the  charge  for  coal  is 
higher  than  the  mere  hauling  expenses,  the  charge  for  silk  is 
lower  than  it  would  otherwise  be  (see  §  210).  The  principle 
of  value  of  service  is  only  another  way  of  stating  the  law  of 
marginal  utility,  and  it  shows  clearly  that  cost  of  production  in 
itself  is  not  the  ultimate  regulator  of  value.  In  the  same  way, 
when  domestic  manufacturers  get  rid  of  a  .portion  of  their 
surplus  output  by  "  dumping "  it  abroad  at  prices  far  lower 
than  at  home,  it  does  not  follow  that  the  lower  foreign  prices 
make  the  domestic  price  higher  than  it  would  otherwise  be. 


§  io8]       Normal  Demand  and  Supply.         253 

On  the  contrary,  the  foreign  sales  at  the  lower  price  may  be 
the  only  means  of  keeping  the  factory  going,  and  may  thus 
make  the  domestic  price  lower  than  it  would  be  if  the  pro- 
ducer had  to  charge  up  to  his  domestic  goods  the  total  ex- 
penses of  unremunerative  production.  Cost  of  production  is 
coming  more  and  more  to  mean  joint  cost ;  the  price  of  a 
given  product  may  bear  only  a  remote  relation  to  its  individual 
cost  of  production. 

108.   Equilibrium  of  Normal  Demand  and  Normal 
Supply. 

In  the  preceding  sections  we  have  several  times  spoken  of 
normal  value  depending  on  cost  of  production.  In  reality  it 
is  only  normal  supply  price  that  is  directly  related  to  cost 
of  production,  while  normal  demand  price  depends  on  the 
strength  of  the  effective  demand.  It  remains,  then,  to  con- 
sider the  mutual  influence  of  normal  demand  and  normal 
supply. 

While  the  existence  of  a  demand  is  the  fundamental  cause 
of  value,  the  influence  of  supply  shows  itself  in  the  fact  that 
the  tendency  of  normal  value  is  to  adjust  itself  to  the  cost  of 
production,  as  we  have  explained  the  term.  A  change  in  the 
normal  demand  for  reproducible  goods  means  a  change  in  the 
normal  supply ;  but  whether  it  means  a  change  in  normal 
value  depends  on  the  law  of  cost.  If  the  demand  for  a  com- 
modity increases  greatly,  the  permanent  output  will  be  larger. 
If  the  industry  is  subject  to  the  law  of  constant  return,  the  price 
will  not  change,  because  the  larger  supply  and  the  larger  de- 
mand will  still  balance  each  other  at  the  old  price.  But  if  the 
industry  is  subject  to  the  law  of  increasing  return,  where  a  larger 
output  involves  a  relatively  smaller  cost,  the  result  will  be  that 
the  producers  will  be  able  to  throw  on  the  market  more  than 
is  needed,  and  the  influence  of  this  augmented  supply  will 
reduce  the  price,  until  there  is  now  a  new  and  permanent  equi- 
librium of  demand  and  supply  at  the  lower  price. 

Since  diminution  of  cost  of  production  is  attended  by  lower 


254  Normal  Value.  [§  109 

prices  and  larger  output,  the  influence  which  seems  to  affect 
normal  value  is  the  change  in  cost  of  production. 

In  truth,  however,  demand  is  a  factor  of  at  least  equal  im- 
portance in  fixing  normal  as  well  as  market  value.  Unless  the 
producers  can  dispose  of  their  enlarged  output,  they  will 
have  no  inducement  to  continue.  If  the  demand  cannot  be 
changed,  the  price  cannot.  But  if  the  demand  can  be  stimu- 
lated by  the  lower  price,  the  supply  will  be  increased  until 
there  is  a  permanent  supply  at  a  fixed  cost  to  satisfy  the  per- 
manent demand.  If  the  supply  changes  owing  to  an  altera- 
tion in  cost,  there  can  be  a  permanent  supply  at  this  new  cost 
only  if  there  is  a  new  permanent  demand.  In  every  case 
there  can  be  a  normal  price  only  if  there  is  an  equilibrium 
between  the  normal  demand  and  the  normal  supply.  So 
that  when  we  say  that  normal  price  is  fixed  by  the  cost  of 
production,  we  really  mean  that  it  is  fixed  at  the  cost  of 
production.  Only  in  this  sense  can  we  speak  of  normal  value 
depending  at  any  given  moment  on  maximum  cost,  or  tending 
in  the  long  run  toward  minimum  cost,  or  being  influenced  in 
particular  cases  by  joint  cost. 


109.  Influence  of  Normal  Price  upon  Market  Price. 

It  is  therefore  inexact  to  say  that  market  price  depends  on 
demand  and  supply,  while  normal  price  depends  on  cost  of 
production,  if  we  mean  by  this  that  the  two  statements  are 
opposites.  All  price  depends  on  demand  and  supply,  but  in 
the  case  of  reproducible  goods  the  permanent  equilibrium 
between  demand  and  supply  tends  to  adjust  itself  to  the 
cost  of  production.  The  rapidity  with  which  this  adjust- 
ment takes  place  depends  on  the  relative  changes  that  oc- 
cur in  demand  and  supply.  If  the  stock  of  cotton  prints 
produced  at  a  cost  of  twenty  cents  a  yard  is  large,  and  if  the 
introduction  of  the  newer  ten-cent  prints  of  the  same  quality 
is  slow,  the  price  will  not  at  once  fall  to  ten  cents.  There 
will  be  a  tendency  for  the  price  to  adjust  itself  to  the  new 


§  no]         Normal  and  Market  Price.  255 

cost,  and  the  greater  the  relative  supply  of  the  new  cloth,  the 
more  quickly  will  the  price  fall.  As  soon  as  purchasers  know 
that  they  can  get  the  same  goods  cheaper  by  waiting  a  short 
time,  only  those  who  cannot  afford  to  wait  will  be  willing  to 
pay  more ;  and  it  is  their  demand  which  for  the  time  prevents 
the  subsidence  of  the  price  to  the  new  cost  level.  When 
the  new  level  is  reached  no  further  change  takes  place,  the 
conditions  will  be  static  and  the  normal  price  permanent. 

If,  on  the  other  hand,  the  cost  of  cloth  continuously  falls 
owing  to  the  introduction  of  successive  improvements,  the 
normal  price  will  itself  be  changing.  The  market  price  will 
move  in  the  direction  of  the  new  cost  or  normal  price,  but  the 
fall  in  cost  may  be  so  rapid,  and  the  influence  of  the  old 
stocks  so  great,  that  the  actual  market  price  may  not  at  any 
moment  quite  reach  the  normal  price.  There  will  be  a  per- 
petual chase,  but  no  reaching  of  the  goal  of  equivalence 
between  the  market  and  the  normal  price.  There  will  be  no 
permanent  equilibrium,  because  there  will  be  a  continual 
change  in  the  forces  affecting  the  supply  and  the  demand. 
Under  dynamic  conditions  the  normal  price  of  commodi- 
ties may  never  emerge,  but  its  influence  is  none  the  less 
marked. 

110.  Normal  Monopoly  Value. 

The  foregoing  discussion  has  proceeded  on  the  assumption 
of  competitive  conditions.  If  by  monopoly  we  mean  the  usual 
case  of  sellers'  monopoly,  the  difference  between  monopoly 
and  competition  lies  entirely  on  the  side  of  supply.  Unless 
there  is  a  change  in  price,  permanent  demand  will  not  ordi- 
narily change  simply  because  competitors  are  supplanted  by 
a  monopolist.  But  the  conditions  affecting  permanent  supply 
are  at  once  altered  by  such  a  transition. 

In  the  first  place,  monopoly  supply  price  is  not  necessarily 
a  unitary  or  single  price.  The  monopolist  may  make  great 
profits  by  selling  different  parts  of  the  supply  of  the  same 
commodity  at  different  prices.  The  principle  here,  however, 


256 


Normal  Value.  [§  no 


is  precisely  the  same  as  in  the  case  of  monopoly  market  price, 
which  has  been  mentioned  above  (p.  235).  There  may  not 
be  one  normal  price,  but  several. 

Secondly,  marginal  cost  has  no  influence  on  price.  It  may 
indeed  happen  that  the  monopolist  controls  several  factories 
which  work  under  different  advantages  so  that  technically  there 
may  be  differences  in  their  expense  of  production.  The  point, 
however,  is  that  no  force  exists  tending  to  fix  the  price  at  the 
point  of  greatest  cost.  One  cotton  factory  in  the  trust  may 
produce  prints  at  five  cents,  another  at  ten  ;  in  the  absence  of 
competition  there  is  no  reason  why  the  trust  should  sell  all  the 
goods  at  ten  cents. 

If  monopoly  price  is  not  influenced  by  marginal  cost,  is  it 
affected  by  cost  at  all?  Assuredly,  but  in  a  more  indirect 
way  than  competitive  price.  Monopoly  price  is  always  at 
the  point  of  maximum  monopoly  revenue.  The  monopolist, 
like  every  one  else,  wants  to  sell  the  greatest  amount  at  the 
highest  price ;  the  monopolist,  however,  controls  the  supply. 
Since  increased  supply  ordinarily  means  lower  price,  he  will 
experiment  until  he  finds  the  point  of  greatest  net  returns. 
The  influence  of  demand  over  which  he  has  no  control  is  as 
potent  as  in  competition ;  the  law  of  substitution  works  here 
as  there.  If  by  reducing  prices  one-half  he  doubles  his  sales, 
the  gross  receipts  will  be  the  same  as  before ;  if  he  cannot 
double  his  sales,  the  gross  receipts  will  fall  off;  if  he  more 
than  doubles  them,  his  gross  receipts  will  increase.  Thus  the 
elasticity  of  demand  is  of  paramount  importance. 

Since  the  supply,  however,  costs  something  to  produce,  his 
net  profits  will  depend  on  the  surplus  of  gross  receipts  over 
cost.  This  surplus  will  vary  not  only  with  the  elasticity  of  de- 
mand, but  also  with  the  elasticity  of  supply.  In  other  words, 
if  the  industry  is  subject  to  the  law  of  constant  cost,  the 
maximum  monopoly  revenue  will  be  reached  at  an  easily  ascer- 
tained price.  If  he  charged  less,  he  would  sell  more,  but  not 
enough  more,  to  compensate  him  at  the  lower  price  for  the 
total  cost  of  the  increased  output ;  his  gross  receipts  would  not 


§  no]          Normal  Monopoly  Value. 


257 


rise  as  fast  as  his  aggregate  cost.  On  the  other  hand,  if  he 
charged  more,  the  sales  would  fall  off  so  quickly  that  the 
decrease  in  his  gross  receipts  would  not  be  offset  by  the  lower 
aggregate  cost  of  the  entire  output. 

If,  however,  the  industry  is  subject  to  the  law  of  increasing 
cost  (diminishing  returns),  the  maximum  monopoly  revenue 
will  be  reached  at  a  higher  price ;  if  it  is  subject  to  the  law  of 
decreasing  cost  (increasing  returns),  it  will  be  reached  at  a 
lower  price.  Suppose  that  the  demand  is  such  that  the 
price  falls  off  regularly  with  the  increase  of  output.  Then 
according  to  the  law  of  constant  cost  we  should  have  a  table 
like  this  : 


Units  Sold. 

Price  per 
Unit. 

Gross 
Receipts. 

Cost  per 
Unit. 

Total  Cost. 

Net 
Receipts. 

500 

Cents. 
3° 

$150 

Cents. 
IO 

#5° 

$100 

1000 

25 

250 

10 

100 

ISO 

2000 

2O 

400 

10 

200 

200 

3OOO 

15 

450 

10 

300 

'5° 

4OOO 

10 

400      - 

IO 

4OO 

~~ 

Thus  the  monopolist  will  make  the  largest  profits  by  putting 
the  price  at  20  cents  and  by  selling  2,000  units.  But  if  the 
law  of  increasing  cost  applies,  according  to  the  figures  in  the 
fourth  column,  it  will  pay  him  to  put  the  price  at  25  cents  and 
to  sell  only  1,000  units.  For  : 


Units  Sold. 

Price  per 
Unit. 

Gross 
Receipts. 

Cost  per 
Unit. 

Total  Cost. 

Net 
Receipts. 

Cents. 

Cents. 

500 

3° 

$150 

10 

$50 

$100 

IOOO 

25 

250 

12 

120 

I30 

2OOO 

2O 

400 

14 

280 

1  2O 

3OOO 

15 

450 

16 

480 

-30 

4OOO 

IO 

400 

18 

720 

-320 

258 


Normal  Value. 


[§  no 


On  the  other  hand,  if  the  law  of  decreasing  cost  applies,  he 
will  find  it  to  his  interest  to  charge  only  15  cents  and  to  sell 
3,000  units.  For : 


Units  Sold. 

Price  per 
Unit. 

Gross 
Receipts. 

Cost  per 
Unit. 

Total  Cost. 

Net 
Receipts. 

Cents. 

Cents. 

500 

30 

$150 

10 

$50 

$ICO 

IOOO 

25 

250 

8 

80 

I70 

2OOO 

2O 

4OO 

6 

1  2O 

280 

3OOO 

15 

45° 

4 

1  2O 

33° 

4000 

10 

400 

2 

80 

320 

In  every  case,  as  we  see,  there  is  a  definite  maximum  mo- 
nopoly revenue. 

Monopoly  price  is  therefore  influenced  by  cost  of  produc- 
tion, but  in  a  different  way  from  competitive  price.  Whether 
it  is  higher  than  competitive  price  depends  again  on  cost. 
Ordinarily  it  will  be  higher,  because  competitive  price  is  cost 
price  (/.  e.  marginal  cost  price),  while  monopoly  price  is  above 
cost  price.  Where  a  monopoly,  "however,  is  created  by  former 
competitors  to  avoid  some  of  the  wastes  of  competition,  the 
cost  may  be  reduced  so  materially  that  it  will  be  profitable  for 
the  monopolist  to  sell  a  largely  increased  supply,  at  a  lower 
price.  In  such  a  case  monopoly  price  may  be  lower  than 
competitive  price. 

In  some  cases,  again,  monopoly  price  may  be  only  very 
slightly  above  competitive  price.  It  frequently  happens  that 
what  seems  to  be  monopoly  is  really  subject  to  potential  com- 
petition. As  long  as  the  monopolist  is  content  to  charge  a 
price  low  enough  to  give  only  moderate  profits,  he  may  retain 
control  of  the  output.  But  if  he  raises  the  price  to  an  exces- 
sive point  he  may  either  tempt  other  producers  into  the  field 
or  lead  the  consumer  to  choose  some  substitute.  This  latent 
or  potential  competition  is  a  factor  to  be  reckoned  with  in  all 
cases  where  the  monopolist  is  not  safely  intrenched  by  some 
legal  or  permanent  economic  advantage. 


§  no]          Normal  Monopoly  Value.  259 

Since  monopoly  profits  depend  partly  on  cost,  the  intelligent 
monopolist  will  strive  to  avail  himself  of  the  newest  processes 
to  reduce  cost.  Provided  that  demand  is  expansible  he  will 
seek  to  reduce  price  as  long  as  gross  receipts  increase  faster 
than  aggregate  cost ;  the  greater  the  reduction  of  cost  per 
unit,  the  more  probable  will  this  result  be.  Thus  under  favor- 
able conditions  monopoly  price  tends  to  fall,  even  though  at 
any  time  it  may  be  above  competitive  price.  The  price  of 
oil  charged  by  the  Standard  Oil  Company,  for  instance,  has  on 
the  whole  fallen,  even  though  the  fall  in  price  has  not  kept 
pace  with  the  still  greater  fall  in  the  price  of  the  crude  petro- 
leum. But  where  the  demand  is  not  so  expansible  as  in  the 
case  of  municipal  street  railways  or  the  gas  supply,  or  where 
the  monopolist  pursues  a  short-sighted  policy,  the  gap  between 
monopoly  and  competitive  price  widens. 


CHAPTER   XVII. 
THE   GENERAL   LAW   OF  VALUE. 

111.  References. 

J.  B.  Clark,  Distribution  of  Wealth  (1899),  chs.  xvii,  xxv,  xxvi ;  F.  A. 
Fetter,  Principles  (1904),  ch.  xliii;  A.  Marshall,  Principles  (1898),  bk.  v, 
ch.  xiv;  F.  v.  Wieser,  Natural  Value  (1893),  bk.  Hi,  ch.  viii;  H.  R. 
Seager,  Introduction  (1904),  chs.  xv,  xvi;  E.  S.  Meade,  Trust  Finance 
(1903),  chs.  xvi,  xvii;  E.  R.  A.  Seligman,  Shifting-  and  Incidence  of  Tax- 
ation, (1889),  bk.  ii,  ch.  iv,  part  2,  ch.  viii,  and  Social  Aspects  of  Economic 
Law,  Presidential  Address  in  Am.  Econ.  Assoc.  Publications,  3d  series, 
no.  i  (1904). 

112.  Value  and  Cost  of  Production. 

In  the  preceding  chapter  we  have  dealt  with  the  value  of 
reproducible  goods.  Value,  however,  attaches  also  to  non- 
reproducible  concrete  goods  as  well  as  to  relations  and  privi- 
leges, to  human  services  and  to  a  fund  of  capital.  How  far  is 
the  value  of  these  related  to  the  cost  of  production  ? 

It  is  clear  that  in  the  case  of  concrete  non-reproducible 
goods  value  stands  in  no  assignable  relation  to  cost  of  produc- 
tion. The  most  prominent  example  is  land.  Land  is  not  the 
result  of  production.  To  be  sure,  if  a  piece  of  virgin  land  lies 
idle  and  a  town  springs  up  around  it,  it  will  soon  acquire  an 
increased  value ;  yet  neither  the  land  nor  any  of  its  qualities 
has  been  produced  by  human  agency.  Efforts  may  indeed  be 
expended  on  the  soil,  and  in  that  sense  some  of  its  qualities 
might  be  deemed  to  be  in  part  the  result  of  production,  but 
even  here  its  value  stands  in  no  relation  to  the  efforts  of  the 
individual.  Again,  take  a  piece  of  old  sculpture  or  furniture. 
It  cannot  be  reproduced ;  it  may  sell  for  a  thousand  times  the 
original  cost.  Finally,  consider  two  equally  good  pictures  by  a 

260 


§H2]  Cost  of  Production.  261 

great  painter  but  finished,  the  one  before  and  the  other  after 
his  attainment  of  renown.  The  difference  in  their  value  can- 
not be  explained  by  any  difference  in  cost  of  production.  In 
short,  the  value  of  concrete  non-reproducible  goods  is  neither 
fixed  nor  measured  by  cost  of  production,  either  because  they 
have  never  been  produced  at  all  by  human  agency,  or  because 
they  cannot  be  reproduced,  or  because  there  is  no  assignable 
relation  between  the  effort  of  the  producer  and  the  present 
price  of  the  product.  Whether  these  goods  be  rented  or  sold, 
their  rental  as  well  as  their  capital  value  does  not  depend  on 
cost  of  production. 

The  value  of  that  class  of  economic  goods  known  as  rela- 
tions and  privileges  likewise  stands  in  no  direct  relation  to 
cost  of  production.  Privileges  and  relations  vary  as  much  in 
character  and  value  as  any  other  kind  of  economic  goods. 
They  may  represent  only  a  single  use,  like  a  put  or  call  on 
the  stock  exchange,  or  a  continuous  series  of  uses,  like  a  per- 
petual franchise  of  a  corporation.  When  they  are  capitalized, 
their  value,  like  that  of  all  other  goods,  is  affected  by  the  dura- 
bility and  certainty  of  enjoyment.  A  permanent  franchise  of 
a  railway  differs  from  the  limited  privilege  of  a  patent ;  but  in 
the  one  case  as  in  the  other  the  durability  and  certainty  of  the 
use  are  independent  of  the  personality  of  the  possessor.  With 
the  good-will  of  a  business,  however,  the  continuance  of  profit- 
able relations  is  often  so  largely  conditioned  by  the  business 
capacity  of  the  temporary  possessor  that  there  is  less  difference 
between  capital  and  rental  value  than  in  the  case  of  a  more 
permanent  or  a  perpetual  privilege.  In  some  instances  the 
trade-mark  is  the  chief  asset  of  a  business.  The  president  of 
the  American  Chicle  Company  recently  testified  that  the  con- 
sumers of  chewing  gum  had  become  so  accustomed  to  certain 
well-advertised  brands  that  the  company  was  able  to  pay  divi- 
dends on  a  capitalization  nine  times  the  amount  of  tangible 
assets.  Over  eighty-eight  per  cent  of  the  value  of  the  property 
was  due  to  the  trade-mark.1 

1  U.  S.  Industrial  Commission,  Final  Report,  §  612. 


262  General  Law  of  Value.  [§  n3 

Whether  privileges  are  durable  or  ephemeral,  it  is  clear  that 
their  value  —  whether  rental  or  capital  value  —  does  not  de- 
pend upon  any  cost  of  production.  The  good-will  of  a 
business  may  indeed  in  one  sense  be  deemed  the  result  of 
laborious  exertion,  but  the  value  of  the  good-will  does  not 
stand  in  any  assignable  relation  to  the  exertion.  It  may  exist 
to-day  and  disappear  to-morrow,  without  any  visible  change 
in  the  proprietor.  Most  franchises  and  privileges,  moreover, 
are  not  the  result  of  any  one's  exertion ;  they  are  the  conse- 
quences of  intricate  social  relations,  and  consist  of  the  opportu- 
nity of  turning  these  relations  to  profit.  Take  even  so  simple  a 
case  as  that  of  a  news-stand  in  a  city.  The  owner  often  rents 
out  the  privilege  of  serving  newspapers  to  a  list  of  customers, 
and  when  the  stand  is  sold  outright  the  chief  constituent  in 
the  price  is  the  value  of  the  "  route,"  —  the  capitalization  of 
the  income  from  the  privilege  of  serving  customers.  Yet  this 
route  may  have  cost  the  original  owner  nothing  to  acquire ; 
as  the  street  was  built  up,  the  route  increased  in  value,  as  it 
were  automatically.  So  also  the  franchise  of  a  railway,  the 
circulation  of  a  country  newspaper,  the  selling  value  of  a  gas 
or  water  company  grows  with  the  mere  process  of  time  and  the 
increase  of  population.  The  social  relations  which  form  the 
basis  of  their  activity  are  not  produced  by  any  individual; 
the  privileges  of  utilizing  these  relations  have  no  cost  of  pro- 
duction. Yet  they  have  a  very  decided  value. 

It  is  not  necessary  to  illustrate  further.  All  these  things  — 
relations,  privileges  and  non-reproducible  concrete  goods  — 
are  daily  bought  and  sold  in  the  market-place,  and  yet  their 
value  does  not  directly  depend  on  their  cost  of  production  and 
cannot  be  measured  by  it.  Since  cost  of  production  cannot  be 
the  general  law  of  value,  what  is  that  ultimate  law? 

113.   Value  and  Efficiency. 

We  have  learned  that  value  is  at  bottom  the  expression  of 
marginal  utility.  It  follows  that  all  prices  must  be  studied 
from  the  point  of  view  of  marginal  utility,  that  is,  of  the  power 


§  113]  Value  and  Efficiency.  263 

of  marginal  increments  of  supply  to  satisfy  the  marginal  in- 
crements of  demand.  This  is  only  another  way  of  stating 
that  the  fundamental  explanation  of  value  is  marginal  effi- 
ciency, or  the  capacity  of  marginal  units  to  satisfy  marginal 
wants. 

(1)  In  the  case  of  concrete  non-reproducible  goods  this  is 
patent.     When  a  farmer  hires  a  piece  of  land,  the  rent  which 
he  pays  depends  on  the  produce  of  that  special  grade  of  land 
as  compared  with  others.     When  a  speculative  builder  secures 
a  site,  the  price  of  the  lot  is  fixed  by  its   capacity,  from  the 
point  of  view  of  eligibility,  to  satisfy  the  wants  of  a  particular 
class  of  tenants.     Whether  he    pays  a  capitalized    purchase 
price   or  an   annual  rent,  as  in   England  and  some  parts   of 
America,  is  immaterial.     Again,  the  value   of  a  painting,  old 
or  new,  is  regulated  by  its  capacity  to  appeal  to  the  taste  of  a 
particular  class  of  amateurs,  that  is,  by  its  marginal  efficiency 
in  contributing  to  the  satisfaction  of  certain  wants.     Cost  of 
production,  as  we  have  learned,  plays  no  direct  role  in  the 
determination  of  value  of  this  entire  class  of  cases.     Not  cost, 
but  efficiency,  is  the  explanation. 

(2)  With  that  class  of  economic  goods  that  we  have  called 
relations  or  privileges  the  situation  is  analogous.     The  rental 
of  the  news-stand,  the  franchise  of  the  gas  company,  a  patent 
or  copyright,  a  new  brand  of  goods  or  a  trade-mark,  —  the 
value  of  all  such  intangible  relations  depends  on  the  extent  to 
which  they  contribute  to  the  earnings  of  the  business.     Their 
value  is  conditioned  by  the  marginal  efficiency  of  the  services 
which  they  render.      The   cost  may  have   been  zero ;  —  not 
cost,  but  efficiency,  affords  the  clue. 

(3)  The   great   mass    of  concrete   reproducible   goods   has 
been  discussed  in  the  preceding  chapter.     Here  indeed  cost 
of  production  seems  to  be  of  commanding  importance.     As 
we  have  learned,  however,  it  is  not  so  much  that  prices  of 
such  goods  are  fixed  by  the  cost  of  production  as  that  they 
are  fixed  at  the  cost  of  production.     The  value  of  all  produc- 
tion goods  is  derived  from  the  value  of  their  products,  —  the 


264  General  Law  of  Value.  [§  113 

consumption  goods ;  the  value  of  the  raw  material  is  derived 
from  the  value  of  the  finished  product.  The  price  of  pig  iron 
depends  on  the  price  of  the  nails,  .billets  and  all  other  iron 
products  into  which  pig  iron  enters  as  a  constituent.  If  the 
demand  for  these  products  should  diminish,  the  price  of  pig 
iron  would  fall,  those  who  produced  at  a  higher  cost  would 
stop  producing,  and  the  new  (marginal)  cost  of  production 
would  adjust  itself  to  the  new  price.  There  is  an  abundance 
of  silver  below  the  surface  that  is  not  mined  because  it  will 
not  pay ;  if  the  marginal  efficiency  or  value  of  silver  should 
rise,  these  more  expensive  grades  would  at  once  be  marketed 
and  the  new  marginal  cost  of  production  would  adjust  itself  to 
the  price.  The  price  would  not  rise  because  the  cost  in- 
creased ;  but  the  higher  price  would  be  fixed  at  the  higher 
cost  because  that  would  now  be  the  new  point  of  marginal 
efficiency. 

(4)  We  come,  finally,  to  the  value  of  human  services  and  of 
the  fund  of  capital.  Wages  and  interest  are  of  such  signal 
importance  in  the  distribution  of  the  social  income  that  their 
fuller  discussion  will  be  reserved  until  later.  It  may,  however, 
be  said  provisionally  that  they,  like  everything  else,  derive 
their  value  from  the  marginal  increments  of  the  services  which 
they  render,  that  is,  from  their  marginal  efficiency.  To  the 
extent  that  labor  is  productively  employed  the  rate  of  wages  in 
each  grade  of  labor  must  in  general  tend  to  equal  the  mar- 
ginal efficiency  of  the  labor,  that  is,  its  contribution  to  the 
product  at  the  margin  of  employment.  In  the  same  way  the 
rate  of  interest  will  tend  to  equal  the  marginal  efficiency  of 
capital,  that  is,  the  actual  contribution  of  the  marginal  incre- 
ment of  capital  employed.  How  these  marginal  contributions 
of  both  labor  and  capital  are  to  be  measured,  and  how  the 
changes  of  actual  life  move  the  margin  of  this  efficiency  up  or 
down,  remain  to  be  considered  later. 

Labor  and  capital,  however,  are  susceptible  of  increase. 
Will  they  then  not  increase  up  to  the  point  of  continuous  cost 
of  reproduction,  and  can  it  not  be  said  that  their  value  is  fixed 


§  113]  Value  and  Efficiency.  265 

by  the  cost  of  production?  In  the  case  of  labor,  if  by  cost  of 
production  we  mean  the  cost  of  the  physical  reproduction  of 
the  laborers,  we  encounter  the  difficulty  that  human  beings  are 
not  reproduced  for  economic  reasons.  But  even  if  we  restrict 
our  attention  to  the  economic  causes  of  the  growth  of  popula- 
tion, and  aver  that  the  future  supply  of  laborers  depends  on  the 
cost  of  reproduction,  that  is,  of  bringing  them  into  the  world 
and  nourishing  them  until  they  become  self-supporting,  the 
obvious  rejoinder  is  that  this  expense  is  a  result  rather  than  a 
cause,  and  that  what  the  laborer  can  afford  to  spend  on  his 
family  will  depend  upon  the  wages  which  he  receives.  It  is 
as  in  the  case  of  reproducible  commodities,  where  value  is 
fixed  at  the  cost  of  production,  but  not  by  the  cost  of  produc- 
tion. The  contribution  or  efficiency  is  the  positive  cause ;  the 
cost  of  production  adjusts  itself  to  this. 

In  the  same  way,  to  speak  of  the  cost  of  production  of  the 
mass  of  capital  is  ambiguous.  Capital  as  a  fund  or  embodi- 
ment of  value  has  in  one  sense  no  assignable  cost.  To  ask 
what  is  the  cost  of  production  of  a  thousand  dollars  is  un- 
meaning. The  thousand  dollars  may  represent  the  present 
value  of  no  longer  fashionable  dress-goods  which  originally 
cost  fifty  thousand  dollars,  or  it  may  represent  the  value  of  a 
newly  discovered  petroleum  well  which  cost  the  finder  nothing. 
In  another  sense,  however,  capital  has  a  cost.  The  mass  of 
capital  consists  of  individual  pieces  of  capital,  and  the  increase 
of  capital  depends  ultimately,  as  we  shall  see,  on  the  readiness 
to  forego  present  gratifications  for  future  satisfactions.  This 
readiness  involves  a  delay  and  generally  therefore  a  cost ;  and 
interest,  as  we  shall  learn,  may  be  explained  in  terms  of  this 
marginal  cost.  But  here  again  the  cost  would  not  be  under- 
gone if  it  were  not  for  the  services  to  be  enjoyed.  So  that  in 
the  end  it  is  the  efficiency  of  the  service  which  is  the  positive 
factor.  The  cost  adjusts  itself  to  the  service. 

Thus  the  great  law  of  value  is  marginal  efficiency.  When 
the  economic  good  is  used  for  productive  purposes,  marginal 
efficiency  becomes  marginal  productivity ;  but  when  it  is  used 


266  General  Law  of  Value.  [§  114 

for  purposes  of  consumption,  we  cannot  well  speak  of  pro- 
ductivity. Not  only  in  the  case  of  wages  and  interest,  but  in 
the  case  of  economic  relations  and  of  concrete  commodities, 
reproducible  as  well  as  non-reproducible,  prices  depend  on 
marginal  efficiency.  In  all  economic  goods  except  labor,  we 
have  to  deal  with  capital  values ;  in  all  economic  goods  except 
the  fund  of  capital  we  have  to  deal  with  rental  values :  the 
rental  as  well  as  the  capital  values  of  all  classes  of  goods  de- 
pends on  their  marginal  efficiency.  In  some  cases  marginal 
efficiency  means  marginal  productivity ;  within  this  class  again 
marginal  productivity  is  in  some  cases  equivalent  to  the  cost 
of  production.  Cost  of  production  is  thus  only  a  partial,  and 
even  then  a  proximate,  explanation  of  value ;  marginal  effi- 
ciency is  the  universal  and  the  ultimate  explanation. 

114.  Efficiency  and  Capitalization. 

Because  of  this  frequent  lack  of  correspondence  between 
value  and  cost,  the  problem  of  the  valuation  of  complex  goods 
often  becomes  one  of  extreme  difficulty.  Where  such  a  good 
regularly  changes  hands  on  the  competitive  market,  the  diffi- 
culty is  obviated  by  the  automatic  action  of  the  forces  of 
demand  and  supply ;  its  earning  capacity  or  marginal  service- 
ableness  can  be  gauged  with  almost  unerring  accuracy,  and 
there  will  be  a  fixed  rate  of  capitalization  depending,  as  we 
have  learned,  on  the  durability  and  certainty  of  income.  A 
good  example  of  this  equilibration  between  income  and  capital 
value  is  seen  on  the  stock  exchange,  where  the  slightest  alter- 
ation in  present  or  prospective  earnings  is  at  once  reflected  in 
a  fluctuation  of  the  quotations.  Even  here,  however,  we  must 
remember  that  the  stock  exchange  quotes  only  market  values  ; 
and  that  these  market  values  are  liable  to  be  affected  by  all 
kinds  of  speculative  influences  not  connected  with  real  earn- 
ing capacity. 

In  actual  life  we  have  to  deal  with  all  possible  combinations 
of  economic  goods.  The  value  of  a  simple  reproducible  com- 
modity may  indeed  be  explained  by  or  referred  to  the  cost  of 


§  115]        Efficiency  and  Capitalization.         267 

production,  because  at  any  given  time  this  cost  is  adjusted  to 
the  price ;  but  the  value  of  a  complex  product  or  business  may 
bear  only  a  slight  relation  to  cost.  The  value  of  a  livery 
stable  differs  somewhat  from  the  value  of  reproducing  the 
horses,  carnages,  harnesses  and  buildings ;  the  value  of  a  huge 
steel  plant  differs  considerably  from  the  cost  of  the  land,  the 
buildings  and  the  machinery ;  the  value  of  a  railroad  has  still 
less  relation  to  its  cost  of  production  or  of  reproduction.  In 
such  cases  we  have  to  do  not  only  with  reproducible  products, 
like  the  concrete  articles  of  steel  or  the  acts  of  transportation, 
but  with  non-reproducible  commodities  and  relations,  like  the 
good-will  of  the  firm,  the  favorable  location  of  the  railroad, 
the  ability  of  the  managers,  and  all  the  other  factors  which 
cannot  be  duplicated,  but  which  enhance  the  profitableness 
and  therefore,  the  value  of  the  business.  Their  selling  value  is 
a  capitalization  of  their  estimated  future  uses. 

The  problem  of  capitalization  in  its  relation  to  efficiency 
has  become  important  in  three  fields,  —  that  of  taxation,  that 
of  regulation  and  that  of  investment.  To  each  of  these  we 
must  now  turn  our  attention. 

115.   Valuation  and  Taxation. 

In  taxation  the  problem  presents  itself  in  two  forms.  The 
first  arises  in  those  countries  which  still  retain  the  property 
tax.  The  difficulty  can  be  illustrated  by  the  taxation  of  cor- 
porations. In  Europe  corporations  are  assessed  on  their 
income,  which  is  ascertained  according  to  fixed  rules.  In 
America  corporations  are,  for  reasons  already  mentioned 
(p.  15),  usually  assessed  on  their  capital  value.  How,  now,  is 
this  to  be  measured  ?  The  corporate  securities  are  often  not 
dealt  in  on  the  stock  exchange,  and  even  when  there  are  such 
dealings,  the  daily  prices  may  be  affected  by  speculative  causes. 
The  cost  of  production  is  of  slight  assistance,  because  it  can 
manifestly  apply  only  to  the  concrete  tangible  property,  and  is 
even  there  inadequate.  It  is  for  this  reason  that  the  valuation 
of  the  corporate  franchise,  as  the  chief  intangible  element,  has 


268  General  Law  of  Value.  [§  115 

become  such  a  burning  question  in  the  United  States.  It  is 
plain,  however,  from  the  foregoing  discussion,  that  no  final 
solution  of  the  problem  is  possible  until  property  assessments 
are  brought  into  a  definite  relation  with  earning  capacity. 
When  commodities  frequently  change  hands,  as  is  the  case 
to-day  with  the  mass  of  concrete  goods,  real  or  personal, 
property  is  a  simpler  basis  of  assessment  than  income,  because 
the  market  influences  automatically  capitalize  the  income. 
But  when  sales  are  infrequent,  as  with  so  many  modern  cor- 
porations, income  or  rental  value  is  the  better  basis,  and  the 
so-called  property  assessments  must  ultimately  adjust  them- 
selves to  the  earning  capacity.  The  practical  difficulty  con- 
nected with  the  ascertainment  of  net  earnings  has  led  many 
States  to  adopt  the  system  of  gross  earnings  taxation.  This  is, 
however,  a  rough  device,  which  fails  to  secure  justice  as  among 
the  members  of  each  class ;  corporate  gross  earnings  tell  us  as 
little  about  relative  net  earnings  as  the  mere  size  of  a  man's 
business  about  his  profits.  It  is  significant  that  in  the  newest 
attempts  to  fix  the  property  valuations  of  railroads,  as  in  Michi- 
gan, the  assessors  after  computing  the  selling  value  of  the  tangible 
property  estimate  the  value  of  the  intangible  property  by 
capitalizing  a  certain  portion  of  the  income  at  a  given  rate. 
Taxable  value  is  made  to  depend  ultimately  on  earning  capacity, 
—  that  is,  on  marginal  efficiency. 

The  other  phase  of  the  problem  is  of  broader  application. 
The  well-nigh  universal  source  of  state  and  local  revenue  in 
America  is  the  general  property  tax.  Ability  to  pay  is  deemed 
to  be  the  fundamental  canon  of  taxation,  and  a  man's  ability 
is  measured  by  his  property.  Owing,  however,  to  the  growing 
difficulty  of  ascertaining  all  the  items  of  property,  certain  classes 
are  reached  with  less  accuracy  than  others,  and  the  tax  be- 
comes virtually  a  partial  property  tax.  From  this  inequality 
of  taxation  flow  two  important  consequences.  In  the  first 
place  we  have  the  phenomenon  of  diffusion  of  taxation.  Where 
a  particular  class  of  property  is  singled  out,  the  tax  will  often 
be  shifted  from  the  producer  to  the  consumer,  or  from  the 


§  115]  Valuation  and  Taxation.  269 

vendor  to  the  purchaser.  If  a  special  tax,  for  instance,  is  levied 
on  leather,  and  the  conditions  of  the  trade  are  such  that  the 
marginal  leather  dealer  can  still  remain  in  business,  the  tax 
will  be  added  to  the  price  that  the  shoemaker  has  to  pay  ;  and 
under  similar  conditions  the  shoemaker  will  increase  the  price 
of  shoes  to  the  consumer.  The  tax  is  shifted  from  one  class  to 
another  until  it  is  diffused  throughout  the  community.  If  a 
special  tax  is  levied  on  houses,  and  population  nevertheless 
continues  to  increase,  the  tax  will  be  shifted  from  the  owner 
to  the  tenant,  and  if  the  tenant  happen  to  employ  the  premises 
for  business  purposes,  the  tax  will  be  added  to  the  price  of 
the  goods  displayed  for  sale.  Furthermore,  if  these  goods 
are  utilized  as  the  materials  of  some  new  production,  the  pro- 
cess will  repeat  itself,  until  the  final  consumer  is  reached. 
If  a  tax  is  levied  on  real  estate  mortgages,  the  rate  of  interest 
will  rise  by  at  least  the  amount  of  the  tax,  and  the  burden  will 
be  borne,  not,  as  is  often  assumed,  by  the  one  who  lends,  but 
by  the  one  who  borrows ;  and  if  the  borrower  happens  to  be 
a  housebuilder,  it  will  be  further  shifted  to  the  purchaser  and 
again  to  the  tenant,  with  ulterior  consequences  analogous  to 
those  just  described.  Through  the  process  of  shifting,  taxation 
of  the  property  often  turns  out  to  be  different  from  taxation  of 
the  property  owner. 

On  the  other  hand,  when,  instead  of  dealing  with  perish- 
able things  like  leather  or  houses,  or  with  a  mere  right  to  a 
sum  of  money  like  a  mortgage,  we  deal  with  more  permanent 
things,  like  a  piece  of  land  or  the  fund  of  capital  itself,  the 
influence  of  capitalization  makes  itself  apparent.  If  a  tax  of 
one  per  cent  is  imposed  on  a  five  per  cent  hundred-dollar 
bond  selling  at  par,  the  net  proceeds  to  the  new  purchaser  will 
be  only  four  dollars,  and  the  price  of  the  bond  will  fall  to 
eighty  dollars,  —  four  dollars  bearing  the  same  proportion  to 
eighty  dollars  as  five  to  a  hundred  dollars.  There  is  no  reaso'n 
why  people  should  content  themselves  with  four  per  cent 
earnings  when  the  general  rate  of  interest  in  the  untaxed  field 
is  five  per  cent.  In  the  same  way,  when  a  special  tax  is  levied 


270  General  Law  of  Value.  [§  115 

on  land,  its  value  will  be  reduced  by  the  capitalization  of  the 
tax.  The  important  consideration  in  each  case  is  the  net 
income,  or  net  rental;  and  when  -this  is  curtailed  by  the 
imposition  of  a  tax,  the  selling  value  will  be  reduced  in  pro- 
portion. Since  the  selling  value  is  the  capitalization  of  the 
rental  value,  the  diminution  in  the  selling  price  is  equivalent 
to  a  capitalization  of  the  tax.  When  a  new  purchaser  buys 
the  bond  or  the  land,  he  discounts  future  taxes  of  the  same 
rate  by  paying  so  much  less  for  the  property  ;  in  other  words, 
he  buys  himself  free  of  the  tax.  Just  as  the  tax  in  the  pre- 
ceding case  was  shifted,  so  now  the  tax  is  absorbed,  —  absorbed 
into  a  lower  selling  price. 

The  far-reaching  consequence  is  this  :  when  classes  of  prop- 
erty are  taxed,  the  processes  of  diffusion  and  of  absorption 
often  result  in  what  may  be  termed  the  final  disappearance  of 
the  tax.  Under  the  competitive  conditions  of  modern  busi- 
ness enterprise,  when  people  part  with  their  property  the  tax 
tends  finally  to  disappear  as  a  permanent  burden  on  the  class 
upon  which  it  is  sought  to  be  imposed.  It  is  not  necessary, 
therefore,  in  order  to  secure  justice  in  taxation,  that  all  individ- 
uals or  every  item  of  property  be  taxed.  Within  each  class  of 
property  holders  every  one  indeed  must  be  assessed ;  but  as 
between  the  classes  of  property  economic  forces  will  bring 
about  a  readjustment.  The  process  is  often  a  painful  one, 
and  in  order  to  injure  the  present  owners  as  little  as  possible 
great  care  must  be  observed  in  altering  existing  methods. 
But  the  ideal  of  imposing  taxes  on  property,  rather  than  upon 
individual  property  owners,  must  be  constantly  kept  in  mind. 
The  attempt  in  the  United  States  to  assess  every  person  upon 
all  his  property  creates  gross  injustice,  because  by  our  hit-or- 
miss  system  some  individuals  in  a  given  class  are  assessed  and 
some  escape.  Those  that  escape  are  generally  the  wealthy ; 
those  that  are  reached  are  for  the  most  par.t  the  ones  who 
cannot  afford  to  pay.  The  general  property  tax  practically 
results  in  a  travesty  of  justice.  When  we  abandon  the  imprac- 
ticable attempt  to  tax  all  property  owners  alike,  and  when, 


§  n6]         Valuation  and  Regulation.  271 

realizing  that  taxation  like  value  itself  is  a  social  phenomenon, 
we  learn  to  tax  some  kinds  of  property  rather  than  all  kinds 
of  individuals,  we  shall  have  made  a  great  stride  forward  in 
practical  as  well  as  theoretical  justice.  It  is  a  process  which 
is  now  slowly  going  on  in  the  more  advanced  industrial  com- 
munities of  America.  Consciously  or  unconsciously,  it  rests 
upon  the  conviction  that  capital  or  property  values  depend  in 
last  instance  on  marginal  efficiency  or  net  earnings. 

116.   Valuation  and  Regulation. 

Another  phase  of  the  problem  is  seen  in  the  difficulty  con- 
nected with  the  official  regulation  of  rates  charged  by  railroad, 
gas  or  water  companies.  Where  such  businesses  tend  to  be- 
come monopolies  the  legislator  seeks  to  protect  the  consumer 
from  exorbitant  charges  by  fixing  maximum  rates.  In  justice, 
however,  the  criterion  of  what  is  fair  to  the  consumer  must  be 
affected  by  what  is  fair  to  the  producer,  for  the  producer  is 
also  entitled  to  a  fair  return  on  his  capital.  The  whole  prob- 
lem thus  hinges  on  the  question  :  what  is  the  relation  of  the 
actual  capital  value  of  the  business  to  the  invested  capital? 
Is  the  actual  value  the  par  value  of  the  securities?  Manifestly 
not,  because  the  stock  may  have  been  watered  to  such  an  ex- 
tent that  its  actual  value  is  only  a  fraction  of  the  par  value.  Is 
it  the  market  value  of  the  securities?  Not  always.  For  the 
market  value  of  the  bonds  depends  not  only  on  the  rate  of 
interest,  but  also  on  the  period  for  which  they  have  to  run.  If 
a  four  per  cent  bond  sells  at  par,  a  six  per  cent  bond  of  the 
same  corporation  and  of  the  same  security  would  normally  sell 
around  150.  But  if  the  four  per  cent  security  is  a  long-time 
bond,  and  the  six  per  cent  a  short-time  bond,  the  difference 
will  be  far  less.  Furthermore,  even  if  they  are  both  fifty 
year  bonds  but  emitted  at  different  periods,  and  if  the  six  per 
cent  bond  matures  in  a  few  years,  the  premium  will  rapidly  de- 
cline with  each  ensuing  year  until  it  finally  disappears.  The 
market  value  of  the  bonds  hence  depends  largely  upon  the 
conditions  of  repayment,  and  is  to  this  extent  divorced  from 


272  General  Law  of  Value.  [§  n6 

the  value  of  the  corporate  property  as  such.  Moreover,  if  we 
take  stocks  instead  of  bonds,  we  find  that  the  value  of  the  cor- 
porate property  cannot  be  strictly  measured  by  the  market 
value  of  the  shares,  because  this  market  value  is  subject  to 
violent  oscillations  on  the  stock  exchange.  The  market  value 
of  the  shares  of  the  Third  Avenue  Street  Railway  Company  in 
New  York  fluctuated  a  few  years  ago  over  one  hundred  per 
cent  in  the  same  year.  On  what  -basis  could  the  real  value 
have  been  computed? 

Finally  it  may  be  asked :  is  the  actual  capital  value  of  the 
corporation  to  be  measured  by  the  cost  of  production  or  of  re- 
production (or,  as  it  is  sometimes  termed,  the  cost  of  replace- 
ment) ?  Here,  again,  the  answer  is,  not  entirely.  For  this 
method  would  take  no  account  of  the  franchises,  acquired  re- 
lations and  general  business  conditions  which  have  developed, 
and  for  the  creation  of  which  the  corporation  may  or  may  not 
be"  responsible.  A  railway  running  through  a  frontier  com- 
munity may  cost  in  stretches  as  little  as  fifteen  thousand  dol- 
lars a  mile  to  build ;  after  the  lapse  of  twenty  years,  the  cost 
of  reproduction  as  measured  by  double  tracking,  better  road- 
bed, new  stations,  bridges,  equipment  and  increased  value  of 
the  land  may  be  perhaps  thirty  thousand  dollars  a  mile.  Yet 
a  capitalization  of  the  actual  earning  capacity  might  result  in 
at  least  double  that  sum.  To  declare  the  entire  difference  to 
be  "water,"  and  to  adjust  rates  so  that  the  old  stockholder 
should  not  profit  by  the  building  up  of  the  country,  or  so  that  the 
new  purchaser  who  has  invested  in  good  faith  should  have  his 
income  cut  in  half,  would  manifestly  be  unjust.  A  corporation, 
like  an  individual,  is  entitled  to  participate  in  the  advantages  of 
general  prosperity. 

The  Supreme  Court  of  the  United  States  has  recognized  the 
truth  that  not  one,  but  all  of  these  factors  must  be  taken  into 
consideration.1  The  ultimate  test  of  fair  capital  value  depends 

1  Smythez/.  Ames,  169!!.  8.466  (1898).  "  In  estimating  the  value  of  a 
railroad,  the  following  points  must  be  considered :  The  original  cost  of 
construction,  the  amount  expended  in  permanent  improvement,  the 


§iiy]          Valuation  and  Investment.  273 

on  a  comparison  of  the  earnings  of  the  enterprise  in  question 
with  those  of  well-managed  and  reputedly  not  overcapitalized 
undertakings  of  a  similar  character. 

117.  Valuation  and  Investment. 

The  third  difficulty  connected  with  valuation  and  capitaliza- 
tion is  seen  in  the  flotation  of  securities  at  the  time  of  the  organi- 
zation or  reorganization  of  great  business  enterprises.  In  former 
years  the  chief  example  was  that  of  railroads.  While  the  early, 
small  railroads  were  largely  built  on  the  proceeds  of  money 
actually  invested  by  the  shareholders,  it  was  not  long  before 
the  doubtful  success  of  the  more  elaborate  enterprises  in  newer 
sections  led  to  the  issue  of  mortgage  bonds,  often  below  par, 
while  the  stock  was  sold  at  an  insignificant  price  or  even  pre- 
sented to  the  shareholders,  in  order  to  make  a  better  market 
for  the  bonds.  In  the  same  way,  when  railways  were  amalga- 
mated or  reorganized,  the  issue  of  new  stock  often  exceeded  the 
aggregate  of  the  old,  the  excess  representing  the  capitalization 
of  the  increased  earnings  which  it  was  expected  would  result 
from  the  combination.  In  these  two  cases  the  issue  of  stock 
might  be  economically  justifiable  either  as  the  sole  practicable 
method  of  securing  capital  for  a  new  and  doubtful  enterprise, 
or  as  the  best  means  of  reducing  prospective  earnings  to  a 
present  basis.  In  the  one  case  the  stock  presented  or  sold  at 
a  discount  represents  the  present  worth  of  an  insecure  and 
speculative  future  ;  in  the  other  case  the  stock  is  the  capitaliza- 
tion of  a  future  income,  just  as  the  issue  of  securities  for  doub- 
ling the  track  is  legitimate  only  when  the  traffic  is  expected 
to  be  so  heavy  as  to  increase  the  income  at  least  to  the  point 
of  earning  a  return  on  the  new  capital.  In  all  such  cases  we 
cannot  properly  speak  of  overcapitalization  or  stock-watering. 

Unfortunately,  however,  there  is  always  the  danger  that  the 
anticipations  may  be  mistaken,  or  that  the  calculations  may 

amount  and  market  value  of  the  bonds  and  stock,  the  present  as  com- 
pared with  the  original  cost  of  construction,  the  probable  earning  capa- 
city of  the  property,  and  the  sum  required  to  meet  operating  expenses." 

18 


274  General  Law  of  Value.  [§  117 

be  designedly  falsified  in  order  to  enable  the  manipulators  to 
dispose  of  stock  whose  worthlessness  they  suspect  or  know. 
Finally,  when  it  seems  desirable,  for  the  purpose  of  evading 
legislative  restrictions  or  of  placating  public  opinion,  to  keep 
down  the  dividend  rate,  the  amount  of  stock  may  be  augmented 
by  the  device  of  scrip  dividends  or  an  increase  of  the  nominal 
amount  of  the  securities  in  the  hands  of  the  shareholders.  In 
all  such  cases  we  have  to  deal  with  stock-watering  pure  and 
simple,  —  that  is,  the  creation  of  additional  securities  which  do 
not  represent  additional  earning  capacity. 

Since  the  formation  of  the  modern  industrial  combinations 
known  as  trusts,  this  aspect  of  capitalization  has  assumed  still 
greater  importance.  The  chief  danger  of  the  situation  con- 
sists in  the  facility  afforded  to  unscrupulous  promoters  to 
finance  the  organization  of  the  combination  in  such  a  way  as 
to  deceive  the  investors  and  to  reserve  the  greatest  profit  for 
themselves,  by  selling  the  inflated  securities  at  prices  wholly 
unjustified  by  prospective  earnings.  The  mere  fact  that  the 
united  capital  of  a  combination  exceeds  the  aggregate  capital 
of  the  constituent  companies  does  not  prove  the  existence  of 
overcapitalization  ;  for  if  the  new  enterprise  is  honestly  financed 
and  well  managed,  the  very  fact  of  union  may  so  enhance  the 
earning  capacity  of  the  whole  as  to  justify  this  capitalized  antici- 
pation of  estimated  profits.  The  distinction  between  economic 
and  uneconomic  finance  or  between  actual  value  and  water  in 
the  investment  of  capital  is  not  only  the  distinction  between 
honesty  and  dishonesty  but  between  intelligence  and  stupidity. 
While  stupidity  will  always  avenge  itself  on  the  stupid,  the 
burden  of  dishonesty  is  likely  to  be  borne  by  the  innocent 
victim.  When  the  loophole  of  competition  is  left  open,  the 
victim  is  not  the  consumer  but  the  unwary  investor ;  when 
competition  is  stifled,  the  loss  may  fall  on  either  or  both. 
The  modern  demand  that  government  should  at  least  insure 
publicity  of  accounts  and  a  reasonable  correspondence  between 
the  prospectus  and  the  actual  facts  in  organizing  vast  enter- 
prises is  a  natural  result  of  the  dangers  of  overcapitalization. 


Book  II. 

Value  and  Production. 


CHAPTER   XVIII. 
CHARACTER   AND    FACTORS    OF   PRODUCTION. 

118.  References. 

A.  Marshall,  Principles  (1898),  bk.  iv,  ch.  i;  W.  Smart,  Distribution  of 
Income  ( 1899),  bk.  i,  ch.  v ;  F.  A.  Fetter,  Principles  (1904),  ch.  xxviii ;  J.  S. 
Nicholson,  Principles  (1893-1901),  bk.  i,  ch.  ii ;  J.  A.  Hobson,  Economics 
of  Distribution  (1900),  ch.  vi ;  H.  Sidgwick,  Principles  (1883),  bk.  i, 
chs.  i,  iv;  F.  A.  Walker,  Political  Economy  (1888),  part  2,  ch.  iv. 

119.   Production :  Its  Meaning  and  Relation  to  Consumption. 

All  wealth  may  be  regarded  from  the  point  of  view  of  the 
producer  or  of  the  consumer.  Commodities  in  the  hands  of 
the  consumer  and  destined  to  immediate  consumption  are 
sometimes  called  consumers'  goods,  while  those  forms  of 
wealth  reserved  for  the  purpose  of  increasing  the  stock  of 
consumable  commodities  are  called  producers'  goods.  Be- 
cause the  latter  serve  as  instruments  of  production,  they  are 
sometimes  called  instrumental  goods. 

Production  and  consumption  clearly  refer  only  to  utilities. 
Man  can  create  nothing  material ;  he  can  only  impart  motion 
to  particles  of  matter  and  so  rearrange  them  that  in  their  new 
form  they  will  gratify  some  desire.  So  also  he  can  destroy 
nothing  material,  for  matter  is  indestructible ;  he  can  only  so 
rearrange  the  position  of  the  particles  as  to  put  an  end  to 

275 


276  Production.  [§  119 

their  utility  in  that  particular  form.  Production  and  consump- 
tion thus  mean  the  creation  and  destruction,  not  of  matter, 
but  of  utilities  through  the  movement  of  matter. 

From  a  certain  point  of  view  production  and  consumption 
are  two  sides  of  the  same  thing.  All  wealth  is  sooner  or  later 
destroyed  in  the  sense  that  the  utilities  embodied  in  the 
particular  commodity  finally  come  to  an  end.  Every  new 
arrangement  of  matter  by  man  ultimately  involves  an  act  of 
consumption,  partial  or  complete.  We  cannot  produce  any- 
thing without  consuming  something,  —  either  commodities  or 
energy,  which  is  itself  in  last  resort  maintained  by  commodi- 
ties. We  can  make  steam  only  by  using  coal ;  we  can  produce 
goods  only  by  wearing  out  the  tool  or  machine.  Not  only 
does  production  involve  consumption,  but  consumption  might 
be  said  to  involve  production.  Production  is  the  creation  of 
utilities.  Commodities  are  consumed  because  they  satisfy 
some  want,  and  in  satisfying  this  want  they  impart  utility.  So 
that  all  consumption  short  of  wanton  or  accidental  destruction 
would  seem  to  imply  production,  because  it  indirectly  yields 
utilities.  Consumption  would  then  involve  production,  just  as 
production  involves  consumption. 

The  distinction,  however,  is  none  the  less  real,  even  though 
difficult  to  draw  in  special  cases.  The  criterion  of  production 
is  not  the  imparting  of  a  utility,  but  the  creation  of  a  new 
utility.  It  is  only  when  an  action  brings  about  an  addition  to 
the  existing  sum  of  utilities,  when,  in  other  words,  there  is  a 
resulting  surplus  of  utility,  that  we  have  an  act  of  production. 
When  a  railroad  company  buys  coal  and  converts  it  into  loco- 
motive power,  there  is  an  act  of  production,  because,  notwith- 
standing the  consumption  of  the  coal,  the  utilities  afforded  by 
the  steam  replace  those  afforded  by  the  coal  together  with  an 
addition.  There  is  more  wealth  than  before.  On  the  other 
hand,  the  food  which  a  man  consumes,  although  it  serves  to 
keep  up  his  strength,  imparts  to  him  certain  personal  quali- 
ties which,  as  we  know,  are  not  wealth.  They  may  help  him 
to  produce  wealth  in  the  future,  but  do  not  in  themselves 


§  119]          Relation  to  Consumption.  277 

constitute  wealth.  The  consumption  of  coal  by  an  engine 
and  of  food  by  a  laborer  are  therefore  not  on  a  par ;  the  one 
is  an  act  of  production,  the  other  an  act  of  consumption.  In 
the  one  man  produces  wealth ;  in  the  other  wealth  produces 
man.  Production  and  consumption  are  as  opposed  as  wealth 
and  man. 

Since  wealth  and  man  are  mutually  interdependent,  produc- 
tion and  consumption  are  closely  related.  In  a  well-ordered 
community  the  object  of  consumption  is  more  production  of 
wealth  and  ultimate  welfare.  Consumption,  however,  does 
not  necessarily  lead  to  this  result.  A  glutton  who  wastes  his 
life  in  riotous  living  decreases  his  power  of  serving  others. 
Thus,  while  consumption  may  be  productive  in  the  sense  that 
it  creates  the  conditions  of  a  future  production,  consumption 
differs  from  production.  Wise  consumption  indeed  leads  to 
more  production  :  only  in  this  sense  are  they  two  aspects  of 
the  same  thing.  The  whole  economic  process  is  a  flow  of 
utilities  from  nature  to  man,  and  back  from  man  to  nature. 

It  is  important  to  remember,  moreover,  that  the  utilities 
which  constitute  wealth  are  not  necessarily  embodied  in  tan- 
gible objects.  Production  is  not  limited  to  the  creation  of 
physical  commodities.  The  older  economists  maintained  that 
the  labor  of  servants,  actors  and  the  professional  classes  in 
general  was  unproductive,  because  not  incorporated  in  visible 
objects.  So  other  writers,  like  Carey,  have  urged  that  the 
trader  is  unproductive ;  and  still  others,  like  the  Physiocrats, 
have  contended  that  only  the  farmer  is  really  productive.  To 
those  who  understand  that  human  wants  are  satisfied  by  utili- 
ties, irrespective  of  the  source  whence  they  flow,  it  is  clear 
that  all  labor  which  engenders  such  utilities  is  productive. 
Labor  is  unproductive  only  when  its  efforts  are  wasted.  If  I 
write  a  book  which  is  read,  or  make  a  table  which  is  used,  my 
labor  is  productive ;  if  the  book  is  a  failure,  or  the  table  use- 
less, my  labor  is  unproductive.  The  trader,  the  lawyer,  the 
doctor,  the  artist,  are  no  less  productive  than  the  workman, 
the  farmer  or  the  manufacturer,  provided  they  accomplish 


278  Production.  [§  120 

something   that  society  wants.     The  test  is  the    creation    of 
new  utilities  or  values. 

The  utilities  of  which  we  speak  -are,  again,  not  necessarily 
direct  utilities.  The  making  of  electric  lights  is  the  creation  of 
direct  utilities ;  the  erection  of  a  successful  school  devoted  to 
the  study  of  electricity  is  the  creation  of  indirect  utilities, 
because  it  will  ultimately  result  in  better  and  cheaper  lights. 
In  the  one  case  we  are  producing  commodities,  in  the  other 
productive  forces ;  in  both  cases  we  are  contributing  to  the 
production  of  wealth.  In  the  same  way  the  sums  expended  by 
a  government  for  its  army  and  navy  may  be  productive  in  the 
highest  sense  if,  as  sometimes  happens,  they  really  contribute 
toward  the  protection  or  furtherance  of  the  national  industry 
or  of  the  national  existence  which  makes  industry  possible.  If 
they  do  not  do  this,  they  are  unproductive,  but  only  in  the 
sense  that  any  unnecessary  or  wasted  effort  is  unproductive. 
Intangible  products,  like  culture  and  taste,  are  often  extremely 
important  to  individual  and  state  alike,  and  when  they  rest  on 
a  broad  basis  of  tangible  wealth  they  are  the  distinguishing 
mark  of  a  high  civilization. 

120.    Kinds  of  Production. 

Production  of  wealth  thus  means  the  creation  of  new  utili- 
ties. The  utilities  that  can  be  added  to  things  are  of  three 
kinds,  —  material,  place  and  time  utilities.  A  material  utility l 
can  be  created  by  an  alteration  in  any  property  of  matter ;  a 
change  in  the  form,  shape,  weight,  color,  taste,  smell  or  any 
other  quality  of  a  thing  which  increases  its  capacity  to  satisfy 
human  wants  is  the  creation  of  a  new  material  utility.  Utility 
can,  however,  also  be  enhanced  by  a  change  of  place.  A  thing 
in  one  place  may  be  worth  more  than  in  another.  If  the  wheat 
were  allowed  to  remain  on  the  Western  plains,  its  utility  would 
be  greatly  circumscribed ;  instead  of  satisfying  the  wants  of 
millions,  it  would  be  consumed  only  by  thousands.  Finally, 

1  Some  writers  speak  of  this  as  a  form  utility.  It  is  clear,  however, 
that  form  is  not  the  only  quality  susceptible  of  change. 


§  1 20]  Kinds  of  Production.  279 

utilities  can  be  augmented  by  a  mere  change  in  time.  The 
alteration  may  take  place  in  the  supply  :  certain  kinds  of  wine, 
musical  instruments  and  similar  products  improve  in  quality 
through  the  mere  lapse  of  time ;  forests,  flocks  and  the  like 
increase  in  quantity.  More  frequently,  however,  the  alteration 
occurs  in  the  demand  :  things  may  be  more  useful  at  one  period 
than  at  another.  The  efforts  expended  in  holding  the  com- 
modity until  it  can  be  of  the  most  effective  service  involve  the 
creation  of  time  utilities. 

All  wants  are  satisfied,  if  at  all,  at  a  given  time  and  place. 
The  creation  of  time  and  place  utilities  is  as  truly  productive 
of  wealth  as  the  creation  of  elementary  material  utilities.  In  each 
case  we  enhance  the  capacity  to  gratify  desires.  Trade  and 
transportation,  which  deal  with  place  utilities,  as  well  as  specula- 
tion and  insurance,  which  deal  with  time  utilities,  are  no  less  pro- 
ductive than  the  activity  expended  in  creating  material  utilities. 
It  is  for  this  reason  that  the  subject  of  exchange  is  properly  to 
be  regarded  as  a  part  of  production.  It  is  for  the  same  reason 
that  it  is  impossible  to  classify  different  kinds  of  activity  as  in 
themselves  more  or  less  productive  or  non-productive.  The 
causes  which  condition  the  law  of  comparative  costs  vary  from 
time  to  time  and  from  place  to  place.  Where  land  is  cheap, 
agriculture  may  be  more  productive  than  industry ;  where  geo- 
graphical conditions  are  favorable,  commerce  may  be  more 
productive  than  either.  To  raise  oranges  in  the  Arizona  desert 
would  be  as  unproductive  as  to  put  a  steel  plant  in  the  wheat- 
fields  of  Kansas ;  yet  when  the  Arizona  desert  is  made  to 
bloom  by  irrigation,  or  when  Kansas  becomes  the  home  of  a 
teeming  population,  oranges  and  steel  may  become  the  most 
productive  of  enterprises.  The  same  considerations  apply  to 
the  productivity  of  efforts  embodied  in  immaterial  wealth.  For 
Oklahoma  to  build  a  magnificent  art  gallery  would  be  clearly 
wasteful ;  for  New  York  to  spend  large  sums  on  music  and  art 
may  be  highly  productive,  even  regarded  from  the  narrow  point 
of  view  of  increasing  the  capacity  of  the  artisan  to  create  more 
artistic  and  therefore  more  valuable  products,  A  high-priced 


280  Production.  [§  121 

school-teacher  would  be  as  unproductive  at  the  country  cross- 
roads as  a  piano  factory  in  Alaska.  Productivity  depends  on 
the  ratio  of  efforts  to  needs ;  with  changing  needs  the  same 
efforts  will  mean  an  altered  productivity. 

121.    Factors  of  Production. 

Since  the  foundations  of  economic  life  are  nature  and  man, 
the  primary  factors  of  production  must  be  natural  forces  and 
human  effort.  Sometimes  natural  forces  alone  suffice,  —  as  in 
the  case  of  the  spontaneous  increase  of  a  herd  of  cattle ; 
sometimes  human. effort  suffices,  as  in  the  case  of  the  rendering 
of  a  personal  service  ;  ordinarily  production  involves  the  co- 
operation of  the  two.  This  is  sometimes  expressed  by  the 
statement  that  the  factors  of  production  are  labor  and  land,  — 
a  not  entirely  accurate  statement,  because  land  is  only  one  of 
the  natural  elements  that  come  into  consideration.  Water, 
light,  heat,  electricity,  moisture  and  the  like  also  play  a  role  in 
production,  and  frequently  constitute  economic  goods  with  a 
definite  exchange  value.  Again,  since  the  application  of  labor 
to  natural  elements  results  in  material  objects,  which  are  then 
further  utilized  in  production,  these  are  often  spoken  of  as 
capital,  and  the  factors  of  production  are  declared  to  be  land, 
labor  and  capital.  Capital  would  then  be  differentiated  from 
land  in  that  capital  is  itself  an  artificial  product,  while  land  in 
the  wider  sense  is  a  gift  of  nature. 

The  question  whether  land  should  be  sharply  separated  from 
capital  maybe  left  for  later  consideration  (§  132).  It  may, 
however,  be  stated  here  that  the  controversy  is  largely  one 
of  words,  depending  on  the  sense  in  which  capital  is  used.  If 
by  capital  we  mean  a  concrete  commodity,  the  joint  product 
of  labor  and  nature,  land  is  to  be  differentiated  from  capital. 
If,  on  the  other  hand,  by  capital  we  mean  wealth  as  a  fund, 
land  is  a  part  of  capital,  since  it  has  a  capital  value.  Even, 
however,  if  we  consider  land  as  a  part  of  capital,  it  is  so  im- 
portant a  part  that  it  may  for  many  purposes  be  put  in  a 
Category  by  itself. 


§  12 1]  Factors  of  Production.  281 

•  Again,  since  the  labor  of  directing  or  managing  enterprises 
has  become  so  significant,  we  might  distinguish  between  labor 
in  general  and  the  skill  or  ability  to  conduct  a  business.  The 
factors  of  production  would  then  be  land,  labor,  capital  and 
management  or  enterprise.  This  classification,  however,  is  not 
entirely  free  from  objection.  If  a  shoemaker  works  for  another, 
his  activity  would  be  called  labor ;  if  he  works  for  himself,  it 
would  be  called  enterprise.  If  a  factory  owner  manages  his 
own  plant,  it  would  be  enterprise ;  if  he  sells  it  to  a  trust  and 
assumes  the  management  as  a  paid  official,  the  same  activity 
is  called  labor.  Manifestly  this  overlooks  the  fact  that  there 
are  all  kinds  or  gradations  of  labor,  from  ordinary  unskilled 
work  to  the  exercise  of  the  highest  business  talent.  It  is  clear, 
from  the  examples  just  given,  that  the  distinction  is  impor- 
tant rather  from  the  point  of  view  of  distribution  than  from 
that  of  production.  If  the  income  from  labor  is  a  stipu- 
lated one,  it  is  wages,  whether  it  applies  to  a  day  laborer  or 
a  railway  president;  if  the  income  is  a  contingent  one,  it  is 
profits.  If  a  man  uses  his  own  unaided  labor,  he  can  earn 
wages ;  if  he  combines  his  labor  with  capital  in  a  business  en- 
terprise or  if  he  employs  other  people's  labor,  he  undergoes 
risks  and  his  income  is  uncertain.  The  hired  or  salaried  man 
always  gets  a  part  of  the  product,  the  independent  entrepreneur 
may  lose  money  instead  of  making  it.  The  law  of  profits  is 
different,  as  we  shall  see,  from  the  law  of  wages.  From  the 
point  of  view  of  production,  however,  enterprise  is  a  species 
of  labor. 

Finally,  it  must  not  be  forgotten  that  in  civilized  society 
production  is  carried  on  amid  an  environment  moulded  by 
legal,  political  and  social  relations.  All  these  may  in  a  sense 
be  declared  necessary  to  production  ;  but  as  they  are  in  theory 
at  least  applicable  to  all  alike,  they  are  not  to  be  included 
among  the  economic  factors  of  production  any  more  than  is 
the  air  which  is  free  to  all.  Even  where  these  relations  in  the 
shape  of  special  laws  or  privileges  favor  some  producers  or 
classes,  they  are  properly  to  be  put  under  the  head  of  oppor- 


282  Production.  [§  122 

tunity  to  utilize  labor  and   capital   rather  than  under  that  of 
the  primary  factors  of  production. 

Summing  up,  we  may  say  that  the  factors  of  production  are 
in  one  sense  labor  and  capital ;  in  another  sense  land,  labor 
and  capital,  and  in  still  a  third  sense  land,  labor,  capital  and 
enterprise.  In  any  sense  the  factors  of  production  are  human 
energy  and  natural  forces,  together  with  their  joint  product, 
capital,  which  may  again  be  embodied  in  land  or  other  ele- 
ments of  nature. 

122.    Production  and  the  Producer. 

Whatever  classification  of  the  agents  of  production  may  be 
adopted,  one  vital  distinction  must  be  observed.  In  the  case 
of  the  non-human  factors  of  production,  whether  they  consist 
of  natural  forces  or  the  results  of  the  application  of  labor  to 
nature,  we  have  to  deal  with  inanimate  objects  and  phenomena. 
The  laws  of  their  increase  can  be  considered  without  refer- 
ence to  any  but  the  technical  consequences  to  the  things 
themselves.  Where  changes,  for  instance,  take  place  in  the 
productivity  of  concrete  things,  the  social  results  —  that  is,  the 
influence  on  classes  of  human  beings  —  may  indeed  be  pro- 
found, but  the  objects  in  themselves  still  remain  inert  masses, 
and  the  laws  which  control  their  earnings  are  irrespective  of  the 
particular  individuals  that  happen  to  own  them.  When  the 
machine  is  useless,  we  throw  it  aside;  when  the  land. is  worn 
out,  we  leave  it. 

On  the  other  hand,  when  we  deal  with  human  energy,  we 
cannot  dissociate  it  from  the  individual  who  exerts  the  energy. 
This  does  not  mean  that  the  laws  of  production  are  less  verifiable 
here  than  in  the  case  of  inanimate  objects.  For  the  personal 
equation  or  difference  between  individuals  presents  no  more 
difficulties  in  analysis  than  do  the  differences  between  things. 
The  distinction  is  to  be  sought  rather  in  the  fact  that  in 
the  one  case  we  deal  only  with  the  means  and  in  the  other 
with  both  the  means  and  the  end.  Human  energy,  like  in- 
animate objects  and  forces,  forms  the  tools  by  which  wealth 


§  122]  Production  and  Producer.  283 

is  secured ;  man  alone  represents  the  end  for  which  wealth 
is  secured.  Hence  in  dealing  with  the  problems  of  production 
through  human  agencies  we  cannot  eliminate  the  consideration 
of  the  producer  as  at  the  same  time  a  consumer.  This  has  a 
double  aspect. 

In  the  first  place  it  admonishes  us  that  the  process  of  pro- 
duction is  social,  and  that  all  production  ultimately  involves 
consumption.  Any  system  of  production,  therefore,  which 
systematically  neglects  the  consuming  powers  of  the  producer 
must  in  the  end  defeat  itself.  The  methods  of  production  may 
conform  to  all  the  approved  technical  rules,  and  each  industry 
may  seem  to  be  flourishing  from  the  point  of  view  of  output, 
yet  none  the  less  the  general  condition  of  business  may  be  far 
from  satisfactory  owing  to  the  lack  of  an  adequate  demand.  In 
former  times,  where  production  was  relatively  slight,  as  in  the 
middle  ages,  or  where  it  was  largely  based  upon  unpaid  human 
labor,  as  in  antiquity,  it  was  the  luxuries  of  the  few  rather  than 
the  wants  of  the  many  that  constituted  the  bulk  of  the  demand. 
In  modern  times,  on  the  other  hand,  where  human  energy  is 
untrammelled  and  the  play  of  competition  tends  to  become 
ever  more  free,  the  effective  demand  comes  from  the  wants  of 
the  many.  If  we  stunt  this  demand,  we  withdraw  the  chief 
stimulus  to  wealth  creation.  The  human  beings  may  be  mag- 
nificent productive  instruments,  but  if  there  is  no  market  for 
their  products  their  potential  energy  is  not  converted  into 
actual  results.  The  more  democratic  the  people,  the  more 
intimate  is  the  dependence  of  the  productive  power  of  the 
community  upon  the  consuming  capacity  of  the  masses. 

Secondly,  we  must  be  careful  to  take  the  broad  view  of 
the  economic  process.  As  we  have  seen,  the  real  concern  of 
economic  inquiry  is  not  wealth  in  itself,  but  wealth  in  its  rela- 
tion to  man,  or,  still  better,  man  in  relation  to  wealth.  A 
system  of  production  which,  however  successful  in  other  re- 
spects, relegates  the  human  factor  to  the  same  level  as  the 
external  object,  is  uneconomic  in  the  broad  sense,  because, 
instead  of  subordinating  wealth  to  man,  it  sacrifices  man  to 


284  Production.  [§  122 

wealth.  A  production  of  wealth  which  is  based  upon  disre- 
gard of  the  human  rights  of  the  producer  is  no  more  truly 
economic  than  is  the  defrauding  of  one  party  to  a  bargain 
by  the  other.  There  are  certain  kinds  of  so-called  produc- 
tion which  in  the  highest  economic  sense  no  civilized  country 
can  afford  to  retain.  Slavery  at  one  time  nominally  enriched 
antiquity,  but  it  brutalized  the  slave  and  enervated  the  slave- 
holder, until  it  dried  up  the  sources  of  production  itself. 
Child  labor  at  the  beginning  of  the  nineteenth  century  helped 
to  swell  the  profits  of  the  English  factory  owner,  but  was  fast 
incapacitating  the  population,  physically  as  well  as  mentally 
and  morally.  If  the  Devil  must  be  a  partner  in  our  cotton 
factories,  said  Carlyle,  we  cannot  afford  to  have  the  cotton 
factories.  And  in  saying  this  he  uttered  a  truth  which  was 
no  less  important  in  its  economic  than  in  its  moral  aspects. 


CHAPTER   XIX. 
LABOR. 

123.  References. 

F.  A.  Walker,  The  Wages  Question  (1876),  chs.  ii-iv  and  Political  Econ- 
omy (1888),  part  2,  ch.  ii;  A.  Philip,  The  function  of  Labor  in  the  Pro- 
duction of  Wealth  (1890)  ;  A.  Marshall,  Principles  (1898),  bk.  iv,  chs.  v, 
vi ;  J.  S.  Nicholson,  Principles  (1893),  bk.  i,  chs.  v,  vii;  F.  A.  Fetter, 
Principles  ( 1904),  ch.  xx  ;  R.  Mayo-Smith,  Statistics  and  Economics  (1899), 
ch.  iii;  K.  Marx,  Capital  (trans,  by  Aveling,  1887),  chs.  xiii-xiv;  W.  S. 
Jevons,  Theory  (1888).  ch.  v;  J.  A.  Hobson,  Evolution  of  Modern  Capi- 
talism (1894),  ch.  x;  S.  and  13.  Webb,  Industrial  Democracy  (1904),  part 
2,  ch.  vi ;  S.  Webb  and  H.  Cox,  The  Eight  Hours  Day  (18  i ) ;  L.  Bren- 
tano  (trans,  by  Arnold),  Hours  arid  Wages  in  Relation  to  Production  (1894) ; 
J.  Schoenhof,  The  Economy  of  High  Wages  (1892);  E.  S.  Meade,  Trust 
Finance  (1903),  ch.  iv;  Thirteenth  Annual  Report  of  the  Commissioner  of 
Labor  on  Hand  and  Machine  Labor  (1899) ;  U.  S.  Twelfth  Census,  VII, 
Manufactures,  part  i. 

124.   Meaning  of  Labor. 

By  labor  is  meant  the  putting  forth  of  human  exertion.  The 
attempt  to  divide  it  into  the  categories  of  physical  and  mental 
labor  is  not  strictly  accurate.  The  labor  of  even  the  most  un- 
skilled workman  calls  for  the  exercise  of  certain  mental  quali- 
ties, like  attention,  memory  and  prudence ;  while  on  the  other 
hand  the  intellectual  effort  of  the  great  captain  of  industry  is 
associated  with  the  expenditure  of  a  certain  amount  of  waste 
of  tissue.  From  the  lowest  to  the  highest  is  a  difference  in  de- 
gree. Ordinary  day  laborers  disclose  almost  endless  varieties  of 
ability,  skill  and  technical  efficiency,  the  result  of  the  education 
of  hand  and  brain  ;  among  the  employers  the  differences  in 
capacity  and  energy  are  no  less  marked.  Labor  runs  through 

285 


286  Labor.  [§125 

the  whole  gamut,  from  worthlessness  to  highest  efficiency,  from 
the  mere  mechanical  repetition  of  the  simplest  act  to  the 
planning  of  the  most  subtle  and  elaborate  business  scheme 
or  intellectual  result. 

Under  present  social  conditions  we  distinguish  between 
laborers  and  capitalists,  between  workmen  and  employers.  As 
a  rough  classification  available  for  many  practical  purposes, 
this  is  defensible.  From  the  point  of  view  of  production,  how- 
ever, it  is  not  wholly  adequate.  Labor  is  undoubtedly  different 
from  capital,  but  the  owner  of  capital  may  also  labor.  The 
employer  is  not  the  same  as  the  employee,  but  he  may  work  as 
hard  and  his  contribution  to  the  value  of  the  product  may 
be  even  more  important.  It  is  hence  a  fateful  error  to  con- 
fine the  term  labor,  as  do  the  socialists,  to  ordinary  manual 
labor,  and  to  maintain  that  all  wealth  is  created  by  labor,  with 
the  implication  that  all  other  shares  in  distribution  are  a  de- 
falcation from  wages  and  therefore  a  robbery  of  the  workman. 
Entirely  apart  from  the  fact  that  there  are  other  factors  of  pro- 
duction, the  contention  overlooks  the  labor  of  organization  and 
enterprise,  of  correlating  the  scattered  elements  of  produc- 
tion and  of  adjusting  the  supply  to  the  varied  demands  of  a 
complex  market.  Such  labor  has  become  under  prevalent 
conditions  of  even  greater  value  to  society  than  the  mere 
manipulation  of  the  tools.  A  modern  railway  president  or 
head  of  a  great  industrial  trust  often  receives  a  salary  equal  to 
that  of  several  hundred  of  his  workmen,  and  larger  than  that  of 
the  President  of  the  United  States.  The  work  may  not  be  so 
irksome  as  that  of  the  day  laborer,  but  it  may  be  worth  far 
more  to  society,  because  its  contribution  to  the  product  is  so 
much  greater.  The  real  value  of  labor  depends  not  upon  the 
conditions  of  employment  but  upon  the  results  of  activity. 

125.   Cost  of  Labor. 

Economic  production  implies  the  turning  out  of  the  greatest 
product  with  the  least  cost.  So  far  as  the  wages  of  labor  form 
an  element  of  cost,  it  would  seem  to  follow  that  low  wages  or 


§  i25].  Cost  of  Labor.  287 

cheap  labor  is  a  necessary  condition  of  low  cost.  Before  ac- 
cepting this  ostensibly  self-evident  proposition,  however,  it  is 
necessary  to  pursue  the  analysis  further. 

In  the  first  place,  we  must  draw  a  distinction  between  the 
individual  and  the  social  point  of  view.  Even  if  it  were  true 
that  in  a  particular  industry  low  wages  denoted  low  cost,  it 
would  not  follow  that  it  is  also  true  from  the  point  of  view  of 
society.  Since  production  is  conditioned  by  consumption, 
there  can  be  no  permanent  increase  in  output  without  an  in- 
crease in  demand.  The  effective  demand,  however,  depends 
upon  the  income  of  the  consumers.  In  any  community  the 
great  mass  of  the  consumers  consists  of  the  laborers.  The 
lower  the  level  of  wages,  therefore,  the  more  restricted  will  be 
the  total  demand  for  the  national  products  in  general  and  the 
slighter  the  chance  of  reducing  cost  by  expanding  the  market. 
Low  wages  which  mean  low  cost  in  some  industries  may  thus 
indirectly  prevent  a  reduction  of  cost  in  other  industries. 
Where  a  particular  set  of  industries  is  manufacturing  almost 
wholly  for  the  foreign  market,  the  effect  may  not  be  so  obvious, 
but  since,  as  in  all  international  trade  imports  must  ultimately 
pay  for  exports,  the  volume  of  the  foreign  trade  finally  depends 
on  the  capacity  of  the  domestic  consumer  to  utilize  what  is 
brought  in.  Thus  even  the  prosperity  of  the  export  industries 
may  be  purchased  at  the  expense  of  the  other  branches  of  pro- 
duction. Irrespective  of  the  general  question  of  the  social 
desirability  of  high  wages  for  the  laborer  himself,  it  is  clear 
therefore  that  when  we  regard  public  wealth  in  general,  low 
wages  do  not  necessarily  mean  low  cost.  The  low  cost  in 
some  industries  may  be  outweighed  by  the  higher  cost  due 
to  the  lack  of  consumption  or  restricted  market  in  other 
industries. 

In  the  second  place,  in  any  single  industry  low  wages  do  not 
necessarily  mean  low  cost.  The  real  cost  of  labor  is  to  be 
measured  by  its  productive  efficiency.  Just  as  the  hundred- 
thousand-dollar  railway  president  is  cheap  because  an  inferior 
and  low-priced  substitute  would  botch  matters  and  increase 


288  Labor.  .[§  125 

expenses,  so  in  the  case  of  the  ordinary  wage-earner  the  real 
cost  is  to  be  measured  by  the  ratio  of  wages  to  the  product  of 
labor.  In  the  Philippines  the  contractors  find  it  in  the  end 
cheaper  to  hire  the  Chinamen  in  preference  to  the  natives,  al- 
though the  former  command  larger  wages;  in  the  Southern 
cotton  factories  the  white  laborer  is  found  more  advantageous 
than  the  negro  factory  hand,  who  can  be  hired  at  a  materially 
lower  wage.  Furthermore,  in  the  same  industry  and  with  the 
same  workmen  neither  an  increase  of  wages  nor  a  curtailment 
of  labor  time  necessarily  augments  cost.  Where  a  reduction  of 
hours  or  an  increase  of  wages  succeeds  in  enhancing  energy, 
care  and  sobriety,  the  output  may  be  greater  than  before.  Es- 
pecially where  fine  machinery  is  used  and  a  high  grade  of 
intelligence  is  required  to  secure  the  best  results,  we  often  find 
a  true  economy  in  high  wages  and  a  lower  cost  in  shorter 
hours.  The  relatively  cheapest  goods  which  are  produced  in 
the  United  States  and  which  successfully  compete  in  foreign 
markets  with  the  products  of  low-priced  labor  are  certain  iron 
and  steel  manufactures,  boots  and  shoes,  clocks  and  the  like, 
where  the  wage-scale  is  notoriously  the  highest. 

Of  course  it  does  not  follow  that  every  increase  of  wages 
or  reduction  of  hours  will  lower  cost.  There  is  at  every 
period  and  in  every  industry  a  limit  beyond  which  the  in- 
crease of  efficiency  will  be  overtaken  by  the  greater  outlay, 
and  it  is  quite  possible  that  there  may  be  no  increased 
efficiency  at  all.  In  such  cases  higher  wages  do  indeed  mean 
greater  cost.  The  mere  fact,  however,  that  goods  sell  at  low 
prices  tells  us  nothing  as  to  the  comparative  rate  of  wages  in 
that  industry.  The  cheapness  of  so-called  white  goods  in  a 
department  store  may  be  due  to  the  low-priced  labor  in  the 
sweat-shops ;  the  cheapness  of  a  Waltham  watch  may  be 
compatible  with  the  very  highest  wage-scale.  So  far  as  labor 
is  a  factor  of  production,  cost  depends  not  merely  upon  wages, 
but  upon  wages  as  compared  with  output.  Under  certain  con- 
ditions there  is  a  true  economy  in  high  wages;  the  more  a 
workman  is  paid,  the  less  he  may  cost. 


§  i26]  Efficiency  of  Labor.  289 

126.    Efficiency  of  Labor. 

Since  the  ultimate  factor  in  the  relation  between  labor  and 
cost  is  productive  efficiency,  the  problem  of  increasing  the 
efficiency  of  labor  is  of  paramount  importance.  The  older 
economists  were  fond  of  emphasizing  the  dependence  of  the 
demand  for  labor  upon  capital.  While  their  analysis  was  in 
many  respects  valuable,  they  overlooked  the  independent  power 
of  labor  to  contribute  to  its  own  uplifting  through  an  increase 
of  efficiency.  It  is  precisely  here  that  the  economic  effects  of 
education  and  leisure  as  well  as  of  social  and  political  progress 
mean  so  much  to  the  community.  In  the  commercial  warfare 
that  is  being  waged  between  nations  to-day,  education  is  recog- 
nized as  a  potent  weapon.  In  the  United  States  the  old-time 
prejudice  against  the  college-trained  business  man  has  given 
way  to  the  recognition  of  his  superiority ;  technical  and  com- 
mercial schools  of  all  grades  are  being  multiplied,  and  even 
the  primary  and  secondary  institutions  are  adapting  their 
curricula  more  successfully  to  the  needs  of  the  ordinary  man. 
The  gist  of  the  negro  problem  in  the  South  is  seen  by  all 
careful  thinkers  to  consist  in  the  increase  of  productive  effi- 
ciency through  an  appropriate  education  of  the  negro.  The 
hope  for  the  Filipino  is  to  be  found  in  the  possibility  of  train- 
ing him  to  habits  of  orderly  and  consecutive  work.  With 
him,  as  with  the  laborer  at  home,  the  significance  of  a  higher 
standard  of  life  —  which  is  only  another  way  of  stating  the 
basis  of  greater  productivity  —  is  to  be  found  not  only  in  the 
domain  of  distribution  and  consumption  but  in  that  of  pro- 
duction. The  finer  the  tool,  the  greater  will  be  the  product ; 
when  the  tool  consists  of  human  energy,  we  have  not  only  a 
greater  product,  but  a  greater  capacity  in  the  human  being 
to  utilize  the  product.  The  short-sighted  employer  to-day  is 
concerned  only  in  securing  the  ostensibly  cheapest  workman 
and  in  driving  him  to  the  utmost ;  the  long-sighted  employer 
finds  it  profitable  not  only  to  pay  fair  wages  for  moderate 
hours,  but  to  surround  his  workmen  by  an  environment  of 

19 


290  Labor.  [§  127 

cleanliness,  comfort  and  attractiveness,  with  provision  for  rest, 
recreation  and  education.  No  one  who  attended  the  St.  Louis 
Exposition  in  1904  could  have  failed  to  be  struck  by  the  ex- 
hibits of  the  Westinghouse  Company  of  Pittsburg  and  of  the 
National  Cash  Register  Company  of  Dayton,  with  the  remark- 
able arrangements  for  the  welfare  of  their  workpeople.  Yet  it 
can  scarcely  be  doubted  that  it  is  "  good  business  "  on  the 
part  of  the  employers,  and  that  all  these  seemingly  needless 
and  sentimental  expenditures  really  involve  a  lowering  of  cost 
of  production  through  enhanced  efficiency  of  labor. 

We  thus  see  the  close  interrelation  between  production  and 
civilization.  Not  only  is  a  lowering  of  cost  the  basic  condition 
of  increasing  wealth  and  progress,  but  the  physical,  moral  and 
intellectual  advance  of  society  inevitably  reacts  upon  the  indi- 
vidual and  renders  him  a  more  capable  and  efficient  agent  of 
production.  State  and  church,  science  and  art,  have  their 
deep  economic  significance.  Progress  is  at  once  a  result  and 
a  cause.  The  true  reduction  of  labor  cost  of  permanent  im- 
portance is  that  caused  by  increased  efficiency.  The  more  of 
a  man  a  laborer  is,  the  better  tool  he  becomes.  Whatever 
society  does  to  improve  the  individual  will  be  more  than 
repaid  by  an  augmented  production  of  wealth. 

127.    Nature  and  Advantages  of  Division  of  Labor. 

In  the  progress  of  efficiency  perhaps  the  greatest  factor  has 
been  the  principle  of  specialization  or  division  of  labor.  In 
its  deepest  aspects  it  is  one  side  of  the  biological  law  dis- 
covered by  von  Baer  and  elaborated  by  Herbert  Spencer,  — 
the  growth  of  all  life  from  uniformity  to  multiformity,  from  an 
incoherent  homogeneity  to  a  coherent  heterogeneity.  From 
the  economic  point  of  view  division  of  labor  may  be  put  into 
four  categories,  —  the  social,  the  industrial,  the  technical  and 
the  territorial  division  of  labor. 

(i)  The  earliest  illustration  of  the  social  division  of  labor 
is  the  differentiation  of  economic  function  between  man  and 
woman.  In  aboriginal  society  certain  kinds  of  work  were 


§  i27]  Advantages  of  Division.  291 

assigned  exclusively  to  the  female.  We  have  seen  the  influ- 
ence of  women's  work  upon  the  evolution  of  the  later  economic 
stages.  Even  to-day,  when  all  careers  are  open  to  women, 
there  is  a  natural  tendency  for  female  labor  to  concentrate 
itself  in  those  groups  where  women  possess  a  peculiar  efficiency 
and  where  there  is  the  least  possible  competition  with  men. 

Apart  from  sex  cleavage  the  earliest  example  of  differentia- 
tion of  function  was  through  the  formation  of  social  classes. 
At  first  every  one  had  to  fight  to  secure  his  food  and  fight  to 
retain  what  he  had  secured.  The  separation  of  a  permanent 
military  class  from  the  industrial  group  was  a  great  step  in  the 
efficiency  of  each  ;  it  is  not  yet  found  in  even  so  comparatively 
developed  a  society  as  that  of  the  American  Indian.  The 
development  of  a  priestly  class,  again,  although  of  chief  impor- 
tance from  the  social  and  religious  point  of  view,  had  a  note- 
worthy economic  effect  in  that  it  permitted  the  industrial 
class  to  devote  itself  more  unremittingly  to  the  daily  tasks  of 
production  without  giving  so  much  of  its  time  to  the  inde- 
pendent propitiation  of  the  malevolent  spirits.  The  priests 
were  in  truth  a  labor-saving  device. 

It  took  ages  for  the  originally  homogeneous  industrial  group 
to  split  up  into  great  classes.  Even  after  centuries  of  prog- 
ress the  husbandman's  family  not  only  worked  up  the  raw 
material  into  roughly  finished  products,  but  exchanged  super- 
fluities with  their  neighbors.  The  cultivator  was  a  handicrafts- 
man and  a  trader,  as  he  is  still  in  part  to-day  on  the  American 
frontier.  An  independent  class  of  traders  was  slowly  differ- 
entiated, and  with  the  originally  greater  importance  of  extra- 
tribal  commerce  the  traders  were  usually  the  aristocrats.  It 
is  only  where  economic  conditions  were  inimical  to  commerce 
and  engendered  the  predominance  of  a  land-owning  aristoc- 
racy as  in  some  of  the  feudal  states  of  mediaeval  Europe  and 
Japan,  that  we  find  a  contemptuous  attitude  toward  trade,  and 
especially  toward  the  small  trader,  who  was  often  at  the  same 
time  a  petty  craftsman.  Finally,  the  artisans  are  separated 
from  both  farmers  and  traders,  and  we  notice  the  development 


292  Labor.  [§  127 

of  the  industrial  class  in  the  narrower  sense  of  the  term,  as 
distinguished  from  the  agricultural  and  commercial  classes. 
With  every  step  in  the  progress  of  society  we  have  a  further 
division  of  labor  within  each  class  until  we  reach  the  modern 
bewildering  complexity  of  occupations  and  professions. 

(2)  Just    as  the    social  division  of   labor   has  denoted   in- 
creased efficiency  of  each  group,  so  within  the  sub-groups  we 
find  the  second  form  of  division  of  labor,  which  may  be  called 
industrial  specialization.     In  the  textile  industry,  for  instance, 
certain  mills  manufacture  only  yarns ;  others  do  nothing  but 
weave  yarns  into  cloth ;  and  still  others  merely  dye  and  finish 
the    product  of  yarn-spinning  and    weaving  mills.     In    New 
England  there  are  shoe  factories  which  make  only  "  uppers  " 
and  others  which  produce  nothing  but  "  findings  "  (counters, 
shanks  and  heel-stiffeners).     In  the  glass  industry  large  estab- 
lishments turn  out  only  one  kind  of  bottle.     Some  branches 
have   even   become  so  completely  specialized    that  there  are 
factories,  as  in  the  bicycle  and  electrical  supply  industries,  where 
nothing  is  done  but  assemble  the  parts  of  a  machine  or  in- 
strument that  are  made  in  other  establishments.     The  advan- 
tages of  this  kind  of  specialization  are  numerous  and  obvious. 

(3)  Thirdly,  we  find  within  each  particular  business  enter- 
prise an  increasing  separation  of  industrial  functions  known  as 
the  technical  division  of  labor.     This   is   a  specialization   of 
process  within  the  same  establishment  rather  than  a  specializa- 
tion in  different  establishments.     It  may  also  be  declared  to 
be  a  specialization  among  workmen  in  contrast  to  the  indus- 
trial division  of  labor  which  is  a  specialization  among  employ- 
ers.    It  is  clear  that  specialization  of  the  workman  saves  time 
both  in  preparation  for  the  trade  and  in  execution  of  the  task, 
while  the  greater  familiarity  with  a  single  process  vastly  aug- 
ments his  dexterity.     It  is  no  less  obvious  that  the  greater  the 
specialization  the  greater  will  be  the  chance  of  the  right  man 
falling  into  the   right    place,   thus   faciltating  the    adaptation 
of  means  to   end.     A  trip   through  any  modern   factory  will 
disclose  tens  —  nay,  even   hundreds  —  of  separate    processes 


§127]  Advantages  of  Division.  293 

designed  to  turn  out  a  product  which  in  former  times  was 
entirely  made  by  a  single  individual.  A  good  example  of  such 
a  subdivision  of  labor,  resting  still  upon  human  labor  force 
alone,  is  to  be  found  in  the  manufacture  of  ready-made  coats, 
which  is  now  in  New  York  divided  into  no  less  than  thirty-nine 
distinct  processes.1 

It  is,  however,  in  cases  where  ample  technical  auxiliaries 
are  used  that  we  find  the  most  minute  subdivision  of  labor. 
Human  energy  can  then  be  reduced  to  the  repetition  of  a 
single  act  like  a  thrust,  a  pull,  a  stroke  or  some  other  simple 
manipulation  of  a  machine.  The  reduction  of  cost  often 
progresses  in  a  far  greater  ratio  than  the  increase  in  the  number 
of  processes,  for  we  have  here  to  deal  not  only  with  the  en- 
hanced dexterity  of  the  workman  but  with  the  almost  endless 
succession  of  labor-saving  devices.  To  make  a  shoe  in  some 
New  England  factories  requires  173  different  operations,  each 
conducted  by  a  class  of  laborers  with  a  special  name.  The 
manufacture  of  a  fine  watch  calls  for  no  less  than  1,088  dif- 
ferent sets  of  workmen  (not  including  the  operations  of  fur- 
nishing the  power),  each  using  a  different  kind  of  machine. 
The  saving  in  cost  due  to  the  introduction  of  machinery  can 
be  illustrated  in  the  jewelry  and  iron  business ;  under  the 
machine  method  1,020  gold  filigree  shells  for  cuff  buttons 
can  be  completed  in  the  same  time  as  one  by  the  hand 
method  ;  in  the  production  of  screws  where  one  man  can  oper- 
ate from  six  to  twelve  machines  the  ratio  of  machine  to  hand 

1  These  thirty-nine  classes  of  workmen  are  :  I.  Fitter  ;  2.  Pocket-maker ; 
3.  Canvas-baster ;  4.  Lapel-padder ;  5.  Bar-tacker ;  6.  Seam-presser ;  7. 
Lining-maker  ;  8.  Lining-operator  ;  9.  Sleeve-maker  ;  10.  Lining-presser  ; 
ii.  Sleeve-presser;  12.  C  oil  ar-p  adder ;  13.  Shaper;  14.  Tape-fuller;  15. 
Lining-baster  ;  16.  Operator;  17.  Presser ;  18.  Edge-cutter;  19.  Edge- 
baster ;  20.  Shoulder-lining  baster  ;  21.  Shoulder-operator  ;  22.  Edge  sleeve- 
baster  ;  23.  Collar-baster  ;  24.  Sleeve-presser ;  25.  Joiner  of  collar  to  lapel ; 
26.  Armhole-baster  ;  27.  Sleeve-sewing  operator  ;  28.  Garment-examiner  ; 
29.  Collar-finisher;  30.  Armhole-lining  finisher;  31.  Basting-puller;  32. 
Edge-presser  ;  33.  Buttonhole-cutter ;  34.  Buttonhole-maker;  35.  Hanger- 
sewer  ;  36.  Presser  of  entire  coat ;  37.  Button-marker  ;  38.  Button-sewer  ; 
39.  Busheller. 


294  Labor.  [§  128 

product  is  4, 49 1  to  i.  In  the  historic  example  of  pin-making, 
where  a  single  workman  unaided  could  originally  turn  out  only 
a  few  pins  a  day,  but  where  in  Adam  Smith's  time  his  prod- 
uct was  five  thousand  pins  a  day,  the  daily  product  per  work- 
man is  now  about  fifteen  millions  of  pins,  complete  and  stuck 
in  the  paper.  The  tables  opposite  pages  294  and  295  will 
illustrate  the  contrast  between  hand  and  machine  labor  in 
various  occupations  in  the  United  States.  It  is  obvious  that 
the  technical  division  of  labor  is  dependent  on  the  existence 
of  a  vast  market.  The  mass  production,  which  results  from 
the  improvement  of  technique  through  division  of  labor,  and 
the  substitution  of  machine  for  hand  methods,  is  profitable  only 
when  the  demand  for  a  cheap  product  is  so  elastic  as  to  be 
susceptible  of  great  increase.  Division  of  labor  and  increase 
of  output  are  thus  correlated.  Each  is  in  turn  the  result  of 
the  other. 

(4)  Fourthly,  the  principle  may  assume  the  form  of  local- 
ization or  territorial  division  of  labor.  In  large  cities  we  find 
the  most  important  wholesale  houses  in  any  line  of  business 
assembled  in  districts  by  themselves.  In  nations  we  find 
various  industries  congregated  to  a  large  extent  in  localities 
which  possess  some  peculiar  advantages,  such  as  proximity  to 
raw  materials,  water  power  or  markets,  favorable  climate,  cheap 
labor,  and  supply  of  capital  or  credit  facilities.  In  the  world 
at  large  the  principle  of  the  territorial  or  geographical  division 
of  labor  is  the  chief  foundation  for  the  free  trade  argument. 
By  allowing  each  section  to  produce  that  for  which  it  is  best 
fitted,  we  shall  manifestly  secure  the  greatest  and  the  cheapest 
production.  In  all  cases,  whether  we  have  social,  industrial, 
technical  or  territorial  division  of  labor,  the  result  is  an 
enhanced  efficiency  of  labor  and  a  proportionate  increase  of 
wealth. 

128.   Defects  of  Division  of  Labor. 

While  the  principle  of  the  division  of  labor  is  undoubtedly 
salutary,  there  are  certain  dangers  which  must  not  be  over- 


HAND  AND   MACHINE  LABOR. 

NUMBER  OF  HOURS    WORKED  UNDER    EACH  METHOD 
IN  PRODUCING  SELECTED  UNITS  OF  MANUFACTURE. 

DESCRIPTION  OF  UNIT. 

YEAR 

NUMBER  OF  HOURS  WORK.ED.    p^   MACHINE 

PRODUCED 

PITCHFORKS    50  PITCHFORKS.  12  INCH  TINES 
PLOW     1  LAND8IDE  PLOW,OAK  BEAMS  AND  HANDLES. 
BAGS    5,000  COTTON  FLOUR  SACKS. 
Rl   ANKROHUQ   12  CROWN    LEDGERS,  8'^X  14^INCHE8, 

BLANKBOOKS  400  PAGE8)  FULLSHEEP. 
BOOKBINDING   soo  12  MO.  BOOKS.  320  PAGES, 

cunp  <;  1°  PA'RS  MEN'S  FINE  GRADE,  CALF,  WELT, 
SI-1VJC3  LACE  SHOESj  SINGLE  SOLES,  SOFT  BOX  TOES. 
OQxpc    1-OOOSTRAWBOARD,  PAPER-COVERED, 
SHOE  BOXES,  11/2X6  X  3/£  INCHES. 

CRACKERS    1,000  POUNDS  GRAHAM  CRACKERS,    PACKED. 
,„-..     200  YARDS  INGRAIN  CARPET,  COTTON  WARP, 
CAKrh  I       WOOL  FILLING,  1088  ENDS,  26  PICKS  PER  INCH 
1  ELLIPTIC  SPRING,  LEATHER  TOP  BUGGY, 
(~ADDIA^C     PIANO  BODY,  DROPPED  AXLES, 
UAKKIAlat     BANDED  HUBS,   CLOTH  TRIMMINGS. 
10  GOLD  HUNTING  WATCH 

\A/A-rru  rACPc  CASES,  18  SIZE,  ENGINE  TURNED, 

WAI  L,M    ^Aitb  BARLEYCORN  SHEILD   PATTERN. 

WATCH  MOVEMENTS  1H8Us,IlENGFubTp^TEVEMENT' 
rniuiRQ  1  GROSS  HORN  DRESSING  COMBS,  7  x  1  VINCHES, 

^UMOO  COARSE  AND  FINE  TEETH  1  CINCHES. 

BARRELS  100  FLOUR  BARRELS,  PATENT  HOOPS. 

ROPE   300  POUNDS^INCH  HEMP  BALING  ROPE 

rnpcpT«;  1  DOZEN  MEDIUM  SATEEN  CORSETS, 
0  17  EYELETS  IN  BLACK. 

WATPUFTC:   12  DOZEN  NO.  2  SHINGLING  HATCHETS, 
HA  1  ^nc.  1  S  22  POUNDS  PER  DOZEN. 
CIDPADMC    1   DOUBLE  BARRELED,  BREECH  LOADING, 
r-IKtAKMb    HAMMERLESS  SHOTGUN. 

DAMDUI    CT-rc    PRINTING  AND  BINDING  4,000  PAMPHLETS, 
PAMPHLETS    32  PAGES,  3/B  X  5%  INCHES, 
p       FOLDING,  STITCHING,  -AND  COVERING  2,000 
MAVjA^IIM"  COPIES-96-PAGE  MAGAZINE,  6^X9^  INCHES 

NEWSPAPERS     PRIN.TING.AND  FOLDING  3.ft,  DOOMAGES. 
1   ITUn/~DADLJV   PRINTING  1,000  SHEETS  ART-WORK, 

i_i  i  nu^KArnr  19  x  28  IN&HES,  e  COLORS. 
TYPESETTING  100,000  EJKS,  NEWSPAPER  WORK. 

p  MrpAWiMr  1  WOODCUT.  7%  X  9  INCHES,  SAME 
C..l\UKAVirMU  PATTERN  UNDER  EACH  METHOD. 

ENVELOPES  50,000  NO.  e^  PLAIN  WHITE  ENVELOPES. 
BUTTER  500  POUNDS,  IN  TUBS. 

1  DOZEN   WHITE  MUSLIN  SHIRTS,  PLAITED  LINEN 
SHIRTS  BOSOMS,   LINEN  COVERED  COLLARS  AND  CUFFS 
ATTACHED. 
I   ni  INirpC  12  OAI<  FRAME,  ROUND  END,  PLUSH  COVERED 
L.UUINOC.S  LOUNGES,   69  X  23  INCHES,  ANTIQUE  FINISH. 

UADMPQQ     1SET  DOUBLE  COACH  HARNESS, 
1-lAKINtii    TRACES  10  STITCHES  PER  INCH. 

GRANITE    DRESSING  150  SQUARE  FEET. 

1836 
1896 

HPB 

1896 
1870 
1896 
1860 
1896 
1862 
1895 
1865 
1895 
1867 
1895 
1858 
1895 
1860 
1895 
1865 
1895 
1850 
1897 
1862 
1896 
1845 
1895 
1895 
1895 
1875 
1896 
1856 
1896 
1855 
1895 
1889 
1897 

3L75 

_28.B3 

an* 

-.ftfl.SJB     1 

auifl 

OL&ti 

•fo.ofij 

_S_J. 

3a.iin  1 

LBI 

-LdOO 

^•*ri  ' 

1895 

5L09 

1896 

47.  7/t   1 

1895 
1867 

1.08 

1896 
1895 
1895 
1865 

J.66 

4-.">.  t-n  i 

1895 
1883 
1895 
1855 

1I1I...O            ,,   1 

•JH 

1896 

10178 

1866 

^^l25'iO(^^$$$$$$$l 

1897 

JS.50 

185S 

1895 
1860 

15168 

1891 
1860 

1895 
1895 

1891 

UyOO 

From  U.S.  Labor  Bulletin  54 


HAND  AND  MACHINE  LABOR. 

NUMBER  OF  HOURS   WORKED  UNDER  EACH  METHOD  IN  PRODUCING  SELECTED  UNITS. 


DESCRIPTION  OF  UNIT. 


YEAR 
RODUCED. 


NUMBER  OF  HOURS  WORKED. 


HANr> 
MACHINE 


AGRICULTURE. 
BARLEY   100  BUSHELS. 
CARROTS  10  TONS  LONG  ORANGE. 
rnRM   50  BUSHELS,  SHELLED;  STALKS,  HUSKS, 

^wniN     AND  BLADES  CUT  INTO  FODDER. 

CORN   50  BUSHELS,   HUSKED,'  STALKS  LEFT  IN  FIELD. 

COTTON  SEED  COTTON,  1,000  POUNDS. 

HAY    HARVESTING  AND  BALING  8  TONS  TIMOTHY. 

OATS   160  BUSHELS. 

PEASE    50  BUSHELS. 

POTATOES  500  BUSHELS. 

RICE    10,  000  POUNDS  ROUGH. 

RYE    100  BUSHELS. 

STRAWBERRIES  soo  QUARTS. 
SWEET  POTATOES  so  BUSHELS. 
TOMATOES  100  BUSHELS. 

WHEAT   50  BUSHELS. 

MINING. 

COAL    50  TONS  BITUMINOUS. 

QUARRYING. 

DRILLING  GRANITE  ^y%Sff'J&m 
DRILLING  ROCK  •**»™'™*ii£™:r  DEEP' 

GRANITE  QUARRYING  50  CUBIC  FEET. 

LIMESTONE  QUARRYING  100  TONS. 

MARBLE  QUARRYING  72  CUBIC  FEET. 
RED  ROCK    QUARRYING  40  TONS. 


TRANSPORTATION,  Etc. 

TRANSFERRING  6,000  BUSHELS 

LOADING  GRAIN  WHEAT  FROM  STORAGE  BINS  OR 

ELAVATORS  TO  VESSEL. 

LOADING  ORE  LOADING  100  TONS  IRON  ORE  ON  CARS. 

TRANSFERRING  200  TONS  FROM 

UNLOADING  COAL  CANAL  BOATS  TO  BINS 

400  FEET  DISTANT. 

UNLOADING  COTTON 


1895-96 
1850 
1895 
1855 
1894 
1855 
1891 
1811 
1895 


1856 

1895 

1866 

1895 

1870 

1895 

1847-18 

1894-95 

1871-72 

1894-95 

1868 

1895 

1870 

1895 

1829-30 

1895-96 


1895 
1897 


1897 


1896 
1890 
1896 
1866 
1897 
1876 


1853 
1896 
1891 
1896 


j 


From  U.S.  Labor  Bulletin  54 


§  128]  Defects  of  Division.  295 

looked.  These  are  the  risks  involved  in  specialization  of  any- 
kind.  A  great  scientist  has  been  described  as  one  who  knows 
something  about  everything  and  everything  about  something. 
Specialization  in  such  cases  is  illuminating.  Many  specialists, 
however,  know  a  great  deal  about  some  one  thing  and  nothing 
about  anything  else.  Specialization  here  is  narrowing  and 
even  dangerous,  because  it  tends  to  prevent  a  broad  power  of 
successful  generalization.  In  the  economic  domain  this  is 
equally  true.  In  the  social  division  of  labor  a  particular  sub- 
group may  pursue  its  own  interests  so  closely  as  to  subordinate 
to  them  the  public  interest,  thus  preventing  an  even  and  well- 
rounded  economic  development.  In  the  territorial  division  of 
labor  the  dependence  of  a  section  or  country  upon  one  par- 
ticular product  may  be  perilous  in  time  of  some  suddenly 
enforced  cessation  of  production,  as  in  the  case  of  the  potato 
famine  in  Ireland  in  the  forties,  or  it  may  check  progress,  as  in 
the  case  of  the  one-crop  system  or  the  sole  reliance  of  a 
country  upon  agriculture.  In  the  technical  division  of  labor 
the  confining  of  the  individual  workman  to  the  mechanical 
repetition  of  a  simple  act  may  tend  to  make  him  a  machine 
rather  than  a  man,  and  to  stifle  and  repress  all  the  powers  of 
initiative.  This  is  in  fact  the  one  great  indictment  brought 
against  the  modern  industrial  system. 

The  danger,  however,  can  be  averted.  In  the  social  division 
of  labor  a  developed  sense  of  social  solidarity,  of  business  ethics 
and  of  political  responsibility  will  insure  a  continually  growing 
adaptation  of  the  parts  to  the  whole.  In  the  geographical 
division  of  labor  a  sound  industrial  and  commercial  programme 
will,  as  we  shall  see,  strive  for  a  diversification  of  industry  by 
supplementing,  and  within  certain  limits  altering,  nature.  In 
the  technical  division  of  labor  the  qualities  which  lie  dormant 
during  the  hours  of  work  may  be  awakened  by  a  judicious  ad- 
mixture of  leisure,  and  by  a  different  attitude  toward  the  work 
itself,  which  can  be  brought  about  in  large  measure  by  techni- 
cal and  industrial  education.  If  machine  industry  and  division 
of  labor  simply  brought  to  the  workman  greater  intensity  of 


296  Labor.  [§  129 

work,  as  the  socialists  contend,  the  result  would  be  disastrous. 
But  if,  as  is  often  the  case,  the  increased  productivity  brings 
with  it  higher  wages  and  shorter  hours,  the  workman's  whole 
standard  of  life  may  be  elevated,  and  his  daily  task  need  no 
longer  engross  the  whole  of  his  physical  and  mental  energy. 
Under  proper  leadership  within  his  own  ranks  and  in  those  of 
the  employers,  he  may  be  a  part  of  the  machine,  and  yet  not 
only  remain  a  man  but  become  more  of  a  man  than  before. 
The  highest  grade  of  American  labor  to-day  is  not  the  cobbler 
who  makes  the  whole  shoe,  but  the  specialist  heel-finisher  in 
the  New  England  shoe  factory.  Under  such  conditions,  as 
they  are  disclosed  by  progress  in  the  most  advanced  nations, 
division  of  labor  may  be  a  blessing  instead  of  a  curse,  and  re- 
main an  aid  to  production  without  becoming  a  menace  to 
individuality.  This  result,  however,  cannot  be  reached  without 
a  struggle  to  retain  the  use,  while  overcoming  the  misuse,  of 
what  is  an  essentially  beneficent  principle. 

129.   Combination  of  Labor. 

Division  of  labor  does  not  describe  the  whole  of  the  process. 
To  be  effective  it  must  be  supplemented  by  the  combination 
of  labor.  This  also  assumes  several  forms. 

(1)  First,  we  have  the  combination  or  co-operation  of  labor 
with  another  agent  of  production,  like  capital.     We  have  seen 
that  the  advantages  of  the  technical  division  of  labor  are  most 
signal  when  machinery  is  employed.     Obviously  the  larger  the 
quantity  of  labor  that  is  saved  through  the  aid  of  capital,  the 
higher  will  be  the    productivity  of   each    remaining   unit    of 
labor ;  the  more  complex  the  entire  process,  the  simpler  will 
be  each  single  portion.     Without  the  co-operation  of  the  two 
factors,  the  division  would  be  less  minute  and  the  output  less 
abundant.     Modern  division  of  labor  is  largely  the  result  of 
the  application  of  capital. 

(2)  Secondly,  we  have  the   technical  combination  of  units 
of  labor  with  each  other.     This  combination  may  be  successive 
or  simultaneous.     In  the  so-called  team  system  in  the  clothing 


§  129]  Combination  of  Labor.  297 

industry,  for  example,  although  each  set  of  workmen  does  its 
allotted  share,  it  is  most  important  that  they  all  proceed  in 
unison,  so  that  no  set  completes  more  or  less  than  can  be 
handled  by  the  next.  Here  we  have  successive  combination. 
In  a  great  steel  foundry  or  rolling  mill,  on  the  other  hand,  each 
detail  of  the  work  may  be  apportioned  to  a  separate  class,  but 
unless  they  all  co-operate  exactly  at  the  critical  moment  the 
product  will  be  worthless.  Here  we  have  simultaneous  com- 
bination. In  both  cases  the  combination  is  effective  because 
of  the  division  of  labor ;  or,  better  stated,  the  result  is  due  to 
the  joint  efforts  of  combination  and  division. 

(3)  Thirdly,  we  have  the  combination  due  to  the  fullest 
utilization,  from  the  outside,  of  the  result  of  each  contribution 
to  the  product.  In  social  division  of  labor  this  is  brought 
about  by  the  principle  of  competition  or  of  societary  control ; 
in  territorial  division  of  labor  it  is  produced  by  the  natural 
forces  of  location ;  in  technical  division  of  labor  it  is  effected 
by  the  organization  of  industry.  Herein  lies  the  great  role  of 
the  manager  and  employer  of  labor,  —  the  entrepreneur  in  the 
technical  sense.  The  head  of  a  great  department  store  or  of 
a  vast  factory  is  akin  to  a  general.  He  must  be  at  once  bold 
and  prudent,  and  must  look  with  one  eye  to  the  ranks  and 
with  the  other  to  the  enemy,  his  competitor.  He  must  be  full 
of  resources  and  of  foresight.  Above  all,  he  must  not  only 
have  an  army  well  disciplined  down  to  the  smallest  detail,  but 
must  possess  the  capacity  to  take  a  large  view,  massing  his 
forces  at  just  the  time  and  in  just  the  manner  to  be  most 
effective.  In  short,  thorough  organization  and  co-operation 
are  the  secrets  of  industrial  as  of  military  success.  The 
great  leader  is  as  indispensable  in  the  one  career  as  in  the 
other. 

Combination  of  labor  is  thus  the  complement  of  division  of 
labor.  The  most  efficient  use  of  the  one  involves  the  employ- 
ment of  the  other.  Specialization  and  co-operation  are  the 
obverse  and  the  reverse  of  the  same  medal ;  they  are  as  neces- 
sary to  a  developed  economic  life  as  are  the  individual  and 


298  Labor.  [§  130 

social  elements  to  human  life,  or  the  centripetal  and  centrifugal 
forces  to  all  life. 

130.  Supply  of  Labor. 

Since  labor  is  a  productive  agent  that  is  susceptible  of  in- 
crease, it  might  seem  that  the  supply  of  labor  will  in  the  long 
run  respond  to  the  demand,  so  that  there  will  never  be  a  de- 
ficiency or  a  surplus.  The  situation,  however,  is  by  no  means 
so  simple,  even  if  we  confine  our  attention  to  ordinary  labor, 
and  abstract  from  that  for  which  special  education  or  remark- 
able natural  gifts  are  required. 

In  the  first  place,  there  may  be  climatic  or  racial  reasons 
which  restrict  the  supply.  In  the  tropics  it  is  sometimes  diffi- 
cult to  induce  the  natives  to  work  for  any  consideration. 
Again,  under  conditions  of  forced  labor,  the  source  of  supply 
may  dry  up;  the  downfall  of  the  Roman  empire  and  the 
decline  of  prosperity  in  the  South  before  the  war  were  due 
to  the  fact  that  cessation  of  conquests  in  the  one  case  and 
the  stoppage  of  the  African  trade  in  the  other  finally  made  the 
slave  too  expensive,  by  limiting  the  supply.  Even  under  the 
modern  system  of  free  labor  there  may  be  both  artificial  and 
natural  obstacles.  We  prohibit  Chinese  immigration,  although 
by  so  doing  we  retard  the  exploitation  of  the  natural  resources 
of  the  Pacific  slope.  We  prefer  a  more  equable,  even  if  slow, 
development  to  the  rapid  tempo  associated  with  diminished 
opportunities  to  the  American  workman.  A  less  defensible 
restriction  of  supply  is  seen  in  the  short-sighted  policy  of  some 
trades-unions  which,  following  the  example  of  the  mediaeval 
guilds,  seek  to  secure  monopoly  returns  by  interposing  all 
manner  of  obstacles  to  membership.  Such  methods,  however, 
involve  a  restriction  in  the  supply  of  special  kinds  of  labor 
rather  than  of  the  general  labor  force,  and  invariably  react 
upon  the  workmen  outside  of  the  particular  unions.  Finally,  a 
natural  obstacle  to  the  free  adjustment  of  the  supply  is  seen  in 
the  case  of  the  so-called  seasonal  demand.  There  are  occu- 
pations where  labor  is  needed  only  at  stated  intervals,  as  for 


§  130]  Supply  of  Labor.  299 

instance  in  farming  at  harvest  or  vintage  time.  Yet  the  laborer 
must  live  during  the  whole  year.  Whenever  economic  con- 
ditions do  not  permit  a  scale  of  wages  sufficiently  high  to  sup- 
port the  workman  during  the  intervals  of  non-employment,  we 
find  these  periodical  complaints  of  scarcity  of  labor. 

On  the  other  hand,  a  striking  example  of  the  relative  over- 
supply  of  labor  is  afforded  by  the  substitution  of  machine  for 
hand  labor.  The  introduction  of  machinery,  however,  does 
not  mean  a  diminution  in  ultimate  demand.  For  the  decrease 
in  cost  and  price  due  to  machine  methods  leads  to  such  an 
enhancement  of  output  that  even  with  a  relative  falling  off 
in  the  number  of  laborers  there  will  ultimately  be  an  increase 
in  the  total  aggregate  of  laborers  employed.  The  replacing  of 
the  stage-coach  by  the  railway  finally  led  to  a  vast  increase  of 
laborers  at  higher  wages,  coupled  with  a  service  at  lower  cost. 
This  result  will  of  course  ensue  only  when  the  increased  profits 
due  to  the  new  machinery  are  saved  and  invested  in  new  cap- 
ital which  gives  employment  to  more  laborers.  If  the  profits 
are  wasted  instead  of  being  saved,  new  machinery  will  be  of 
no  advantage  to  the  laborer.  In  point  of  fact,  however,  the 
profits  are  normally  saved.  The  immediate  result  is  often  a 
temporary  oversupply  in  the  particular  trade  and  the  discharge 
of  workmen  who  for  the  time  being,  and  until  they  finally 
drift  to  the  new  openings,  swell  the  ranks  of  the  unemployed. 
One  of  the  most  serious  problems  of  the  modern  industrial 
system  is  how  to  mitigate  the  evils  of  this  transition  period. 

In  the  long  run,  however,  under  modern  conditions  of  the 
free  play  of  economic  forces  the  supply  of  labor  will  adjust 
itself  to  the  demand  through  changes  in  the  growth  of  popu- 
lation. The  fundamental  point  here,  however,  is  the  rate  of 
remuneration  or  scale  of  wages,  —  a  discussion  of  which  must 
be  left  to  the  next  book. 


CHAPTER   XX. 
LAND. 

131.   References. 

J.  B.  Clark,  Distribution  (1899),  ch.  xiii ;  R.  Mayo-Smith,  Statistics  and 
Economics  (1899),  cn-  lv  >  A.  Marshall,  Principles  (1898),  bk.  iv,  chs.  ii, 
iii ;  H.  R.  Seager,  Introduction  (1904),  ch.  vi ;  A.  S.  Johnson,  Rent 
in  Modern  Economic  Theory  (Am.  Econ.  Assoc.  Publications,  1902), 
ch.  ii ;  R.  M.  Hurd,  Principles  of  City  Land  Values  (1903) ;  M.  B.  Ham- 
mond, The  Cotton  Industry,  part  I,  The  Cotton  Culture  (Am.  Econ.  Assoc. 
Publications,  new  series,  no.  I,  1897) ;  E.  J.  Payne,  History  of  America,  I 
(1892),  342,  366-384;  U.  S.  Industrial  Commission,  Report  (1902),  X,  and 
XIX,  46-1 23. 

132.   Land  as  a  Separate  Factor  of  Production. 

Land  is  generally  distinguished  from  capital  as  a  separate 
factor  of  production.  The  distinction,  however,  is  sometimes 
made  on  insufficient  grounds. 

(i)  It  is  claimed,  for  instance,  that  land  is  a  gift  of  nature, 
while  capital  is  a  product  of  labor.  It  must  be  remembered, 
however,  that  economics  has  to  deal  with  value,  and  that  from 
the  point  of  view  of  value  it  is  difficult  to  draw  so  sharp  a  line. 
Into  many  tracts  of  land  there  has  been  put  as  much  labor  as 
into  equally  valuable  concrete  products.  Without  the  dykes  of 
Holland  and  the  irrigation  works  of  arid  America  the  land 
would  be  worthless.  In  some  garden  plots  on  the  European 
continent  the  tenant  on  leaving  is  permitted  to  take  with  him 
several  inches  of  soil,  —  the  value  of  the  land  is  as  much  or 
as  little  a  product  of  labor  as  in  the  case  of  other  things.  It 
may  be  contended,  however,  that  the  value  of  urban  land  at 
least  is  not  a  product  of  labor.  But  how  about  the  value  of  a 
newspaper,  or  a  banking  business  ?  As  the  country  town  be- 

300 


§  132]  Land  and  Production.  301 

comes  a  prosperous  city,  the  newspaper,  like  the  corner  plot, 
becomes  more  valuable,  even  though  the  editor  works  no  harder 
than  before.  The  circulation  increases  through  the  operation 
of  the  same  social  forces  which  raise  the  value  of  the  land. 
There  may  indeed  be  more  newspapers,  but  there  will  also  be 
more  corner  plots.  Even  if  we  attempt  to  reduce  values  to  the 
quantities  of  labor,  it  is  hazardous  to  distinguish  between  land 
and  capital  on  this  ground :  in  a  diamond  drill,  which  is  as- 
suredly a  piece  of  capital,  the  overwhelming  share  of  the  value 
may  be  ascribable.to  the  raw  material  or  gift  of  nature,  and 
only  a  small  part  to  labor ;  in  a  truck-farm,  three-quarters  of 
the  value  of  the  land  may  be  found  in  labor  and  only  a  quar- 
ter in  the  gift  of  nature.  In  other  words,  in  the  value  of 
some  land,  labor  plays  a  large  role  ;  and  in  the  value  of  some 
capital,  nature  plays  a  large  role.  This  distinction  is  hence 
inadequate. 

(2)  Again,  it  is  contended  that  land  is  indestructible,  while 
capital  is  perishable.  Here,  again,  the  rejoinder  may  be  made 
that  the  qualities  which  give  value  to  the  land  are  not  indestruc- 
tible. It  is  a  commonplace  that  the  chemical  ingredients  of  the 
soil  need  to  be  constantly  renewed.  The  best  agricultural  land 
may  become  the  worst,  and  the  worst  the  best,  after  a  few 
generations  of  exploitation  or  thrift,  as  the  case  may  be.  But 
surely,  it  will  be  said,  the  qualities  of  extension  or  location  are 
indestructible.  Even  here,  however,  it  must  be  observed  that 
the  two  things  are  not  identical.  The  mere  extension  of  land 
is  indeed  indestructible,  but  it  gives  no  value.  All  land  is 
alike  in  extension,  —  the  worthless  and  the  valuable.  Location 
is  extension  plus  situation,  just  as  fertility  is  extension  plus 
chemical  ingredients.  Location  gives  value  to  land,  but  loca- 
tion is  not  indestructible  as  an  economic  factor.  The  land 
may  remain,  but  the  value  may  change  because  of  an  alteration 
in  its  contiguity  to  a  market.  The  land  is  still  there,  but  the 
market  may  disappear,  and  thus  to  all  intents  the  economic 
location  of  the  land  suffers  a  change.  Any  falling  off  in 
demand  such  as  a  decrease  or  shifting  of  population,  a  change 


302  Land.  [§  132 

in  commerce,  an  alteration  in  the  conditions  of  transportation, 
may  reduce  or  wipe  out  land  values.  In  the  deserted  mining- 
towns  of  the  West  the  value  of  the  land  has  vanished,  perhaps 
never  to  return.  Value  is  a  product  of  human  relations : 
nothing  human  is  indestructible. 

(3)  It  is  often  said  that  land  is  fixed  in  quantity  and  not 
reproducible.  To  this  the  double  answer  may  be  made  :  some 
other  things  are  non-reproducible  as  well,  and  in  the  true 
economic  sense  land  itself  is  really  not  fixed  in  quantity. 
Reproducibility  is  a  relative  term  :  some  things  can  be  easily 
reproduced ;  some  with  difficulty ;  some,  like  old  coins  or 
works  of  art,  not  at  all.  Furthermore  the  supply  of  land  can 
be  increased  both  actually  and  relatively.  There  have  always 
been,  and  still  are,  vast  stretches  of  unused  and  worthless  land 
in  every  country  and  of  comparatively  worthless  land  near 
every  city ;  whenever  it  becomes  profitable,  new  areas  are  put 
under  cultivation  or  covered  with  residences.  The  striking 
fact  of  the  past  century  has  been  the  increase  in  the  supply  of 
arable  land  and  the  growth  of  urban  areas.  Even,  however,  if 
all  the  land  in  a  given  county  or  city  is  occupied,  its  economic 
utilization  can  be  increased,  and  that  is  equivalent  to  a  relative 
growth  of  supply.  More  intensive  farming  in  the  country  or 
better  or  higher  structures  in  the  city  have  the  same  effects  as 
an  increase  in  supply.  The  limit  here,  as  in  all  economic 
goods,  is  the  margin  of  utilization. 

While  the  differences  between  land  and  other  things  that 
constitute  capital  are  thus  differences  in  degree  rather  than  in 
kind,  it  remains  none  the  less  true  that  land  may  usefully  be 
put  into  a  separate  category.  This  is  due  to  the  fact  that  an 
increased  supply  of  other  things  in  general  involves  a  dupli- 
cation of  the  thing  itself,  while  the  increased  supply  of  land 
involves  a  difference  in  location  or  fertility..  To  call  this  the 
law  of  diminishing  returns  is  in  one  sense  inexact,  since  the 
law  of  diminishing  returns  is  applicable  to  everything  that 
possesses  value.  The  law  of  diminishing  returns,  however,  has 
peculiar  consequences  when  applied  to  land.  If  an  employer 


§  133]  Fertility.  303 

needs  more  laborers,  he  can  ordinarily  secure  an  increased 
supply  at  the  same  wages,  even  though  there  is  a  certain  point 
beyond  which  it  does  not  pay  him  to  employ  more.  If  a 
manufacturer  needs  additional  machines,  he  can  ordinarily  buy 
them  at  the  same  price,  even  though  he  will  buy  only  up  to  a 
certain  limit.  In  fact  the  progress  of  society  means  more 
machines  or  more  capital  at  lower  cost.  But  if  more  land  is 
needed,  recourse  must  be  had  to  less  fertile  or  less  well-situ- 
ated land,  which  normally  means  a  higher  cost.  The  more 
t  intensive  farming  or  the  higher  structures  referred  to  in  the 
last  paragraph  amount  indeed  to  an  increase  in  the  supply  of 
land,  but  they  also  involve  an  increase  of  cost 

Economic  progress,  then,  may  have  different  effects  on  land 
as  compared,  not  indeed  with  all  other  things,  but  with  the  great 
mass  of  other  production  goods.  The  advance  of  invention 
and  civilization  is  apt  gradually  to  reduce  the  prices  of  manu- 
factured articles,  but  the  increase  of  output  and  of  civilization 
may  lead  to  a  greater  demand  for  given  tracts  of  land,  and  there- 
fore to  an  increase  in  their  price.  A  moderate  tax  on  ordi- 
nary commodities,  reproducible  at  pleasure,  tends  to  decrease 
their  number  and  thus  to  increase  their  price  ;  a  similar  tax  on 
the  value  of  land  is  apt  to  exert  no  influence  on  its  existence, 
and  therefore  none  in  increasing  its  price. 

While  land  thus  is  a  part  of  capital  from  the  point  of  view 
of  the  laws  which  explain  the  nature  of  rental  value  in  gen- 
eral, and  the  relation  of  rental  to  capital  value,  land  is  usefully 
contrasted  with  capital  if  we  compare  changes  in  land  rents 
and  values  with  changes  in  the  great  mass  of  other  things,  the 
increased  production  and  accumulation  of  which  constitute 
progress.  Because  of  the  social  significance  of  such  relative 
changes,  it  is  legitimate  to  put  land  into  a  separate  category. 

133.  Fertility  of  Land. 

Land  has  value  as  a  factor  in  production  either  because  it 
yields  some  concrete  produce  or  because  it  affords  a  service  as 
the  physical  support  of  man.  The  productivity  of  land,  that 


304  Land.  [§  133 

is,  the  value  of  its  contribution  to  wealth,  depends  in  either 
case  on  two  facts,  —  its  fertility  and  its  situation.  The  fertility 
is  a  result  of  the  constituents  of  the  soil  combined  with  its 
extension  ;  situation  is  not  simply  extension,  but  geographical 
location.  According  to  the  uses  to  which  land  is  put,  we 
divide  it  into  the  categories  of  pasture,  agricultural,  forest, 
mineral  and  urban  land.  Each  of  these  is  again  divisible : 
pasture  land,  for  instance,  into  sheep,  goat,  hog  and  cattle 
pasture  ;  agricultural  land  into  meadow  and  plough  (or  arable) 
land  with  as  many  sub-classes  as  there  are  varieties  of  crops ; 
forest  and  mineral  lands  according  to  the  character  of  the 
timber  or  mineral  (including  under  this  designation  such  non- 
metallic  products  as  coal  and  oil)  ;  urban  land  into  business, 
residential,  apartment  or  tenement  land. 

So  far  as  the  element  of  fertility  is  concerned,  land,  like  all 
other  forms  of  wealth,  is  subject  to  the  law  of  diminishing 
returns.  A  given  tract  of  pasture  will  support  a  certain  num- 
ber of  cattle,  but  after  a  definite  limit  has  been  reached  each 
additional  head  will  mean  a  greater  draft  upon  the  resources  of 
the  land,  with  the  result  that  the  whole  herd  will  be  underfed 
and  either  suffer  decimation  by  exhaustion  and  disease  or  fetch 
a  lower  price  in  the  market.  In  agricultural  land  there  is  at 
every  moment  a  maximum  return  from  the  application  of  a 
given  amount  of  labor  or  capital.  In  a  small  and  lonely  New 
England  farm  the  best  results  may  come  from  employing  a 
laborer  for  every  few  acres  and  not  utilizing  expensive  imple- 
ments ;  in  the  far  West  it  may  be  more  profitable  to  use  the 
costliest  machines  and  to  economize  in  human  labor;  in  a 
truck  farm  the  application  of  rich  manures  may  yield  the 
greatest  profits.  In  all  cases  there  is  a  point  beyond  which 
any  additional  "  dose  "  of  capital  or  labor  will  give  propor- 
tionally smaller  returns.  Under  normal  conditions  of  progress 
the  self-interest  of  the  individual  farmer  may  be  relied  upon  to 
ascertain  this  point.  Under  a  system  of  free  competition  each 
farmer  will  seek  to  secure  the  largest  produce  from  his  land, 
and  the  greater  the  output,  the  lower  will  be  the  price.  The 


§  i33]  Fertility.  305 

private  interest  of  the  producer  will  thus  tend  to  coincide  with 
the  general  interest  of  the  community.  This  is  at  once  the 
basis  and  the  justification  of  private  property  in  agricultural 
land. 

In  the  case  of  timber  land  this  coincidence  between  private 
and  public  interests  is  by  no  means  so  unqualified.  In  grazing 
land  the  pasture  replenishes  itself  from  season  to  season ;  in 
agricultural  land  the  crop  follows  within  a  few  months,  or,  as  in 
the  case  of  fruit  lands,  within  a  few  years  of  the  application  of 
labor  or  capital.  But  in  forest  land  the  reproduction  of  the 
grove  takes  decades  or  even  centuries.  A  wise  forest  policy 
which  endeavors  to  insure  a  continuous  supply  to  the  public  will 
therefore  content  itself  with  felling  only  the  ripe  timber.  Private 
interest,  on  the  other  hand,  which  looks  to  immediate  gains  may 
derive  more  profit  from  the  complete  clearing  of  the  forest. 
When  the  woods  are  practically  inexhaustible,  as  in  the  early 
period  of  American  civilization,  it  makes  but  little  difference. 
But  when  the  forests  are  denuded  to  such  an  extent  as  not  only 
to  cut  off  the  supply  of  useful  woods  but  seriously  to  endanger 
the  equable  flow  of  the  streams  and  to  threaten,  as  in  Spain,  an 
alternation  of  complete  drouth  with  devastating  inundations,  the 
situation  becomes  serious.  Timber  land  here  can  best  accom- 
plish the  social  ends  of  production  through  a  policy  which 
combines  the  cutting  of  the  mature  trees  with  the  preservation 
of  the  forest  itself.  It  is  partly  for  this  reason  that  govern- 
ments are  everywhere  retaining  or  adding  to  their  forest  lands, 
as  in  the  United  States  with  its  sixty-four  national  forest 
reserves  and  numerous  state  parks ;  while  some  countries  even 
seek  to  control  the  action  of  private  forest  owners,  in  the  effort 
to  prevent  denudation  or  to  secure  reforestation. 

In  mineral  lands  the  possibility  of  reproduction  is  excluded 
by  the  very  nature  of  the  case.  The  law  of  diminishing  returns, 
however,  is  equally  operative,  even  though  its  working  is  apt  to 
be  obscured.  In  some  mines  it  becomes  necessary  to  go  deeper 
for  an  increased  supply,  with  a  resulting  rise  of  cost  which 
finally  becomes  prohibitive  and  leads  to  a  complete  cessation 

20 


306  Land.  [§  134 

of  operations.  Even  where,  as  in  the  oil  or  diamond  fields  or 
in  some  coal  or  iron  mines,  the  returns  seem  to  be  constant 
from  year  to  year,  we  are  in  the  presence  of  diminishing 
returns,  for  the  source  of  the  returns  is  itself  being  slowly 
consumed.  At  the  end  of  a  given  period,  be  it  short  or  long, 
not  only  will  the  returns  abruptly  stop,  but  the  possibility  of 
securing  any  further  yield  in  the  future  will  also  have  disap- 
peared. As  was  explained  above,  we  must  therefore  abstract 
from  each  recurring  return  a  sum  which  when  capitalized  at  the 
rate  of  production  will  ultimately  amount  to  the  total  original 
capital  and  replace  the  value  of  the  initial  stock.  Translated 
into  ordinary  business  language,  we  must  allow  for  depreciation, 
—  a  depreciation  which,  when  continued  long  enough,  will 
entirely  absorb  the  original  capital.  The  life  of  the  anthra- 
cite coal  fields  in  Pennsylvania,  for  instance,  is  estimated, 
on  the  basis  of  the  present  rate  of  production,  at  between 
one  and  two  hundred  years ;  and  of  the  English  coal  fields 
at  somewhat  less.  In  the  case  of  agricultural  land,  then,  ad- 
ditional doses  of  capital  or  labor  will  yield  a  relatively  smaller 
produce ;  in  the  case  of  mines  or  badly  managed  forests  the 
ostensible  produce  may  be  the  same,  but  the  real  net  return 
on  the  original  unimpaired  investment  becomes  constantly 
smaller. 

Even  in  the  case  of  urban  land  the  same  law  applies.  The 
fertility,  that  is,  the  productive  service,  of  certain  lands  con- 
sists in  yielding  support  to  buildings.  It  may  indeed  be 
profitable  to  replace  a  tent  by  a  wooden  shanty,  a  shanty  by  a 
stone  house,  and  perhaps  even  a  stone  house  by  a  steel  sky- 
scraper. Obviously,  however,  at  a  given  moment  there  will  be 
a  point  beyond  which  a  more  expensive  structure  will  not  yield 
proportionate  returns. 

134.         Situation  or  Geographical  Location  of  Land. 

The  value  of  all  production  goods  is  derived,  as  we  know,  from 
that  of  the  products  or  consumption  goods.  Oranges  do  not  sell 
at  higher  prices  than  potatoes  because  the  owner  must  pay 


§  134]  Location.  307 

more  for  orange  lands  than  for  potato  lands ;  on  the  contrary, 
orange  lands  cost  more  than  potato  lands  because  the  oranges 
that  can  be  grown  on  an  acre  sell  for  a  larger  sum  than '  the 
potatoes  that  can  be  raised  on  the  same  area.  Whether  the  land 
can  be  used  for  oranges  rather  than  potatoes  often  depends  as 
much  on  location  as  on  fertility.  The  most  fertile  land  may 
be  so  far  removed  from  the  market  that,  notwithstanding  the 
great  potential  supply  of  the  produce,  the  land  will  be  value- 
less because  there  is  no  effective  demand  for  its  product.  The 
mutations  in  value  due  to  changes  in  situation  are  in  modern 
times  far  greater  than  those  due  to  changes  in  fertility.  The 
fruitfulness  of  land  is  subject  to  the  alternations  of  weather  or 
chances  of  nature,  but  it  may  on  the  whole  be  kept  fairly 
unimpaired  with  reasonable  care,  and  may  be  increased  up  to 
a  certain  point  by  unremitting  attention.  The  economic 
changes  in  situation,  on  the  other  hand,  are  often  sudden,  long- 
continued  and  unpredictable.  The  orange  lands  in  Southern 
Italy  have  recently  been  ruined  by  the  rapid  introduction  of 
California  fruit  into  the  Eastern  market ;  the  wheat  lands  of 
England  have  suffered  greatly  during  the  last  half-century  by 
the  opening  up  of  vast  stretches  in  the  New  World.  Per 
contra,  when  the  Erie  Canal  was  completed  the  sections  near 
the  terminals  appreciated  enormously,  and  we  have  daily 
examples  of  the  sudden  rise  of  value  in  districts  newly  served 
by  a  railroad.  • 

These  considerations  apply  to  urban  land  as  well.  In  the 
main,  and  especially  when  long  periods  are  taken,  the  value  of 
urban  lands  grows  with  the  development  of  the  city.  Mere 
agglomeration  of  population  does  not  involve  an  increase  of 
land  values,  if,  as  in  Naples  to-day,  the  growth  of  population 
is  accompanied  by  a  lessening  of  business  prosperity  and  there- 
fore by  a  diminution  in  the  income  of  the  consumer  and 
tenant.  But  where  numbers  increase  with  prosperity,  land 
values  naturally  rise.  The  mutations  of  situation,  however,  do 
not  always  result  in  an  advance.  Certain  sections  in  Greater 
New  York  are  to-day  worth  less  than  a  few  decades  ago, 


308  Land.  [§  134 

because  the  tide  of  business  or  fashion  has  ebbed  rather  than 
flowed.  The  introduction  of  new  trolleys  or  subways  has 
advanced  some  sites  but  depreciated  others. 

It  is  largely  due  to  the  element  of  situation  that  different 
classes  of  land  are  within  certain  limits  capable  of  being 
transformed  into  each  other.  A  diamond  field  can  of  course 
not  yield  a  good  rice  crop,  nor  can  rubber  forest  land  ever  be 
profitably  utilized  for  oats.  But  pasture  land  may  become 
wheat  land,  wheat  may  be  supplanted  by  garden  produce,  and 
truck  farms  in  turn  may  change  into  cheap  suburban  sections 
and  finally  into  expensive  business  sites.  From  this  point  of 
view  land  possesses  great  mobility.  In  a  certain  physical  sense 
land  is  fixed,  while  everything  else  is  movable,  —  and  this  is 
the  basis  of  the  legal  distinction  between  movables  and  im- 
movables. But  in  the  economic  sense  land  is  mobile,  and 
capital  as  opposed  to  land  is  immobile.  A  machine  can  best 
be  used  for  a  particular  purpose,  and  is  only  rarely  serviceable 
for  anything  else ;  a  piece  of  land  can  often  serve  any  one  of 
a  large  number  of  different  uses.  Any  economic  fact  which 
brings  about  a  relative  change  in  situation  confers  mobility 
upon  land. 

Since  situation  is  such  an  important  element  in  productivity, 
all  changes  which  tend  to  diminish  distance  by  bringing  the 
producer  and  consumer  together  are  a  mark  of  progress.  The 
previously  existing  sources  of  supply  may  fall  in  value,  as  in 
the  case  of  the  New  England  farms  or  the  Italian  orange  groves, 
but  the  existing  stock  of  wealth  as  a  whole  is  increased  by  the 
reduction  of  cost.  It  is,  however,  important  to  remember  that 
so  far  as  the  productivity  of  land  is  ascribable  to  situation,  its 
rise  in  value  is  more  and  more  due  to  its  increasing  contri- 
bution to  the  production  of  other  things  than  the  mere  agri- 
cultural produce.  An  industrial  enterprise  is  located  in  a  city 
for  the  same  reason  as  a  workman  or  a  lawyer :  the  greater 
expense  of  the  land  for  the  factory  or  the  home  is  more  than 
offset  by  the  lower  costs  in  other  respects  or  by  the  expectation 
of  higher  returns.  With  the  growth  of  industry  and  population 


§  i35]  Cultivation.  309 

the  productivity  of  land  depends  more   and  more  on  situation 
and  relatively  less  on  mere  fertility. 

135.   Cultivation  of  Land. 

So  far  as  situation  is  concerned,  the  increase  of  productivity 
is  solely  a  result  of  the  progressive  elimination  of  the  costs  of 
transportation.  So  far  as  fertility  is  concerned,  a  far  larger 
field  of  activity  is  open  to  human  ingenuity.  The  application 
of  labor  to  land  is  its  cultivation.  Agricultural  products  are 
commonly  divided  into  fruits,  roots,  cereals  and  leguminous 
plants.  Food-roots  and  cereal  grasses  are  found  in  a  state  of 
nature,  and  their  cultivation  and  improvement  play  somewhat 
the  same  role  in  progress  as  does  the  domestication  of  wild 
animals.  There  have  been  five  important  stages  in  agricultural 
development. 

(i)  The  first  is  the  system  of  migratory  agriculture  or  the 
shifting  of  the  arable  area.  This  is  found  at  the  outset  in  all 
countries  where  land  is  abundant  and  where  the  community 
is  on  the  point  of  abandoning  the  hunting  or  the  pastoral  life. 
A  particular  plot  is  tilled  for  a  season  or  two  in  the  roughest 
manner,  and  when  the  soil  begins  to  show  evidences  of 
deterioration  the  cultivators  abandon  the  land  and  pass  on  to 
a  fresh  tract,  perhaps  to  return  to  the  first  after  a  long  time 
has  intervened  and  restored  its  primitive  fertility.  Where  the 
land  is  covered  with  forests,  a  clearing  is  made  by  fire,  the 
ashes  fertilizing  the  ground  and  the  stumps  being  allowed  to 
remain  and  rot.  Because  of  this  burning  process,  the  system 
is  also  called  essartage.  Where  the  land  is  near  the  seashore 
seaweed,  as  in  the  American  colonies,  is  frequently  employed 
as  fertilizer. 

Migratory  agriculture  was  applied  to  both  roots  and  cereals. 
Root  culture  generally  precedes  that  of  cereals,  and  no  real 
civilization  was  ever  based  on  root  culture  alone.  In  America, 
for  instance,  before  the  advent  of  the  white  man,  the  potato 
and  the  manioc  gave  way  to  maize,  and  where,  as  in  Hayti,  this 
was  not  the  case,  there  was  but  slight  progress.  As  Payne  has 


310  Land.  [§  135 

pointed  out,  cereal  agriculture  alone,  among  the  forms  of 
food- production,  taxes,  recompenses  and  stimulates  labor  and 
ingenuity  in  an  equal  degree. 

(2)  The  second  stage  is  that  of  surface  tillage  or  stationary 
agriculture.     As   the  forests  disappear  or  the  supply  of  free 
land  diminishes,  the  essartage  or  migratory  system  gives  way 
to  the  more  permanent  occupation  of  a  given  area,  and  its 
periodical    reduction    to    a    state    of  tilth.     Much    of  course 
depends  on  conditions  of  climate.     In  the  Old  World  were 
found  wild    culminiferous   grasses  which    made    possible    the 
cultivation  of  wheat,  barley,  oats,  rye,  millet  and  rice.     In  the 
New  World,  although  other  indigenous  grains  existed,  the  wild 
corn  or  maize  soon    became    practically  the  only   cultivated 
cereal.     This,  together  with  the  fact  that  no  important  beasts 
of  burden  like  the  ox  or  the  horse  are  found  in  historic  times, 
goes  far,  as  was  remarked  above,  to  explain  the  lower  level 
of  civilization  reached  by  the  Indians  in  Mexico  or  Peru,  com- 
pared with  the  natives  of  Asia  and   Europe.     Where  the  soil 
is  composed  of  alluvial  deposits  or  possesses  great  fertility  for 
other  reasons,  the  natural  surface  affords  so  abundant  a  yield 
that  only  very  slight  manuring  is  needed  to  furnish  a  practically 
continuous  crop.     Surface  tillage  may  therefore  also  be  called 
the  one-crop  system.     When  the  land  retains  its  fertility  with 
little   labor,   and  where  there  is  a  constant  demand  for   the 
particular  product,  this  one-crop  system  may  persist  for  a  long 
time. 

(3)  Usually,  however,  some  form  of  rest  is  found  to  im- 
prove  the   fertility    of  the    land.     We    thus   reach  the   third 
stage  of  what  is  best  called  alternating  agriculture.     That  is, 
there  is  an  alternation  of  crop  and  fallow,  the  same  piece  of 
land   being  cultivated   one    year,  serving  as  a  rough  pasture 
the  following   year.     At  any  .given  time,  therefore,  there  are 
two  fields,  —  one  for  the  crop,  one  lying  fallow.     This  is  hence 
also    called  the    two-field  system.     It  was  soon  ascertained, 
however,  that  still  better  results  could  be  attained  by  extend- 
ing the  alternation  to  the  crops  as  well,  and  we  thus  reach  the 


§  135]  Cultivation.  31 1 

three-field  system,  the  same  field  being  devoted  the  first  year 
to  wheat,  the  second  to  oats,  and  lying  fallow  the  third  year. 
This  system,  which  is  found  throughout  mediaeval  Europe,  is 
also  called,  the  open-field  or  intermixed  system,  because  the 
land  was  cultivated  in  narrow  strips,  each  cultivator  possessing 
one  or  more  strips  in  different  parts  of  the  field,  separated 
from  the  other  strips  not  by  any  fence  or  hedge  but  only  by 
small  ridges  or  balks. 

(4)  The  fourth  stage  is  reached  when  a  substitute  is  found 
for  the  recurrent  fallow  or  waste.  This  consists  in  so  increas- 
ing the  number  and  variety  of  the  crops,  and  in  such  a  skilful 
use  of  animal  and  mineral  manures,  that  the  fertility  of  the  soil 
is  kept  practically  constant  without  any  fallow  at  all.  This 
system  is  known  as  that  of  convertible  husbandry,  or  in  its  still 
more  developed  stages  as  that  of  the  rotation  of  crops  or 
diversified  farming.  It  involves  the  use  in  turn  of  cereal  and 
root  crops,  and  especially  the  application  of  artificial  grasses 
like  clover.  In  England,  where  the  transition  took  place  in 
the  eighteenth  century,  it  was  also  called  the  system  of  en- 
closures, because  the  method  of  separate  strips  was  abolished, 
and  the  whole  field  was  now  cultivated  in  the  same  way, 
separated  from  the  adjoining  fields  by  a  hedge  or  fence. 

The  earlier  systems  of  agriculture  involve  the  use  of  much 
land  and  of  comparatively  little  labor.  They  are  hence  called 
extensive  systems.  The  greater  the  effort  made  to  secure 
larger  crops  by  economizing  land  rather  than  labor,  the 
nearer  we  approach  the  system  of  intensive  farming.  When  it 
is  found  profitable  to  economize  in  labor  rather  than  in  land 
through  the  use  of  capital  in  the  shape  of  farm  machinery,  we 
reach  the  most  modern  form  of  large-scale  agriculture,  which  is 
usually  termed  capitalistic  farming,  and  which  will  be  discussed 
later.  At  any  given  period,  however,  extensive  farming  may 
be  more  economical  than  intensive  farming. 

In  the  United  States  we  find  most  of  these  phases.  The 
period  of  essartage  or  forest  clearing  was  soon  followed  by 
the  surface  tillage  or  one-crop  system,  which  still  prevails  over 


312  Land.  [§  135 

a  large  part  of  the  South.  The  open-field  system,  however, 
flourished  only  in  very  small  sections  of  the  East,  because  the 
rapid  increase  in  wealth  in  the  North  and  West  rendered 
profitable  the  transition  on  the  one  hand  to  large-scale  farming 
and  on  the  other  to  the  more  intensive  system  of  crop  rota- 
tion. With  the  advance  of  prosperity  the  most  effective  use  of 
the  land  leads  to  continual  changes.  In  large  sections  of  the 
East,  for  instance,  the  cultivation  of  cereals,  with  the  possible 
exception  of  corn,  has  become  unprofitable.  The  less  fertile 
lands  have  been  converted  into  permanent  pasture,  and  the 
increase  in  the  average  fertility  of  plough  and  meadow  lands 
coupled  with  the  growth  of  forage  crops  and  the  use  of 
the  silo  tends  to  diminish  the  relative  amount  of  cultivated 
land.  The  process  of  transition  culminates  in  the  dairies  and 
market-gardening  farms  of  the  thickly  populated  communities. 
Given  liberty  and  intelligence,  the  farmer  may  be  relied  on  to 
choose  that  form  of  tillage  which  is  most  profitable  to  him  and 
most  productive  to  the  community. 


CHAPTER   XXI. 
CAPITAL. 

136.  References. 

J.  B.  Clark,  Distribution  (1899),  chs.  ix-xii ;  F.  A.  Fetter,  Principles 
(1904),  ch.  xviii;  E.  v.  Bohm-Bawerk,  Positive  Theory  of  Capital  (1891), 
bk.  ii,  ch.  ii;  W.  S.  Jevons,  Theory  (1888),  ch.  vii;  T.  N.  Carver,  Distri- 
bution (1904),  ch.  vi ;  R.  Mayo-Smith,  Statistics  and  Economics  (1895), 
ch.  v;  F.  A.  Walker,  Political  Economy  (1888),  part  2,  ch.  iii ;  T.  Veblen, 
Theory  of  Business  Enterprise  (1904),  chs.  ii,  ix;  A.  Marshall,  Principles 
(1898),  bk.  iv,  ch.  vii;  A.  T.  Haclley,  Economics  (1896),  ch.  v;  J.  S. 
Nicholson,  Principles  (1893),  bk.  i,  ch.  vi,  and  Machinery  and  Wages 
(1892),  chs.  iv,  v;  H.  Sidgwick,  Principles  (1883),  bk.  i,  ch.  v;  H.  R. 
Seager,  Introduction  (1904),  ch.  vii;  R.  Giffen,  Economic  Inquiries  (1904), 
part  2;  W.  P.  Trowbridge,  Report  on  Power  and  Machinery  Employed  in 
Manufactures  (U.S.  Tenth  Census,  Extra  Volume,  1888)  ;  U.  S.  Twelfth 
Census,  VII ;  United  States  Industrial  Commission,  Report,  XIX  (1902), 
5 r 4-544- 

137.   Kinds  of  Capital. 

We  have  seen  that  capital  in  its  broadest  sense  includes 
everything  that  has  a  capital  value.  The  totality  of  capital 
is  equivalent  to  the  totality  of  wealth.  Capital  would  then 
comprise  three  great  categories:  (i)  consumption  capital,  or 
wealth  which  affords  a  benefit  income,  like  food,  jewels,  books 
in  the  hand  of  the  consumer;  (2)  lucrative  or  acquisitive 
capital,  that  is,  any  form  of  wealth  including  relations  like  the 
franchise  of  a  corporation  or  the  good-will  of  a  business  which 
gives  a  money  income;  (3)  production  capital,  or  concrete 
goods  which  are  utilized  to  produce  more  goods.  In  treating 
of  capital  as  an  agent  of  production  it  is  with  this  third  aspect 
that  we  have  to  deal.  From  the  point  of  view  of  progress, 
moreover,  this  is  the  important  aspect,  since  the  first  condition 

3*3 


3  H  Capital.  [§  137 

of  progress  is  the  increase  of  the  concrete  goods  that  consti- 
tute wealth. 

Capital  in  this  sense  can  be  further  classified  into  land  and 
other  capital.  If  capital  be  regarded  as  either  consumption 
or  lucrative  capital,  there  is  no  need  for  such  a  distinction. 
Whether  a  man  enjoys  an  estate  or  a  painting  is  immaterial,  — 
neither  can  perhaps  be  duplicated  as  consumption  capital. 
Whether  he  applies  a  fund  of  a  given  amount  to  the  purchase 
of  a  farm  or  a  share  of  stock  is  again  immaterial,  so  far  as  each 
represents  so  much  lucrative  capital.  But  as  an  agent  of  pro- 
duction, land,  as  we  have  seen,  stands  in  a  relation  socially  so 
peculiar  to  the  producer,  and  is  moreover  of  such  paramount 
importance  when  compared  to  any  other  single  category  of 
concrete  goods,  that  it  is  best  discussed  by  itself. 

Capital  as  an  agent  of  production  is  sometimes  classified  as 
fixed  and  circulating  capital.  The  original  distinction  of  Adam 
Smith  was  that  circulating  capital  comprised  goods  from  which 
profits  could  be  derived  only  by  their  circulating  from  hand  to 
hand,  like  finished  products,  while  fixed  capital  was  that  which, 
like  a  house,  yielded  a  revenue  without  changing  hands  or  cir- 
culating any  further.  As  a  matter  of  fact,  however,  the  only 
kind  of  capital  which  circulates  indefinitely  is  money ;  in  other 
cases,  as  when  a  product  goes  direct  to  the  consumer,  there 
may  be  only  one  change  of  hands.  The  great  aim  of  modern 
enterprise,  in  fact,  is  to  reduce  the  circulation  to  the  narrow- 
est limits. 

Another  way  of  explaining  the  distinction  is  to  say  that  fixed 
capital  comprises  such  things  as  can  be  used  repeatedly  for 
productive  purposes  without  suffering  much  change ;  and  that 
circulating  capital  consists  of  things  the  single  use  of  which 
would  convert  them  from  the  category  of  production  goods 
into  that  of  consumption  goods.  A  machine  would  be  fixed 
capital ;  the  leather  just  before  being  converted  into  the  shoe 
would  be  circulating  capital.  This  is  virtually  the  distinction 
between  durable  and  perishable  wealth.  It  is  also  sometimes 
expressed  as  a  distinction  between  active  and  passive  forms 


§  137]  Kinds  of  Capital.  315 

of  capital,  the  active  capital  being  the  fixed  capital  which,  like 
the  machine,  makes  the  impression,  the  passive  capital  being 
the  circulating  capital,  which,  like  the  leather,  receives  the 
impression.  This  nomenclature  is  less  happy  in  that  it  ob- 
scures the  fact  that  all  forms  of  productive  capital  co-operate 
with  each  other,  and  in  this  sense  are  really  active. 

Another  classification  of  capital  is  that  according  to  the 
uses  to  which  it  can  be  put,  as  agricultural,  commercial,  indus- 
trial and  financial  capital. 

1 i )  By  agricultural  capital,  strictly  speaking,  is  meant  some- 
thing   different    from    land    or    landed    capital.     Agricultural 
capital  is  not  land,  but  the  things  applied  to  the  land ;  land  or 
landed  capital  is  the  ground  itself.    When  we  speak  of  a  man 
putting  his  capital    into  land,  we  mean  that  he  invests  in  a 
piece  of  land  ;  when  we  say  that  he  applies  capital  to  land, 
we  mean  that  he  spends  his  money  on  better  farming  tools  or 
machines,  manures,  drains  or  beasts  of  burden.     In  the  former 
case  we  would  have  land  or  landed  capital ;  in  the  latter  we 
have  agricultural    capital.      This  distinction,  however,  is  fre- 
quently not  observed. 

(2)  When  the  concrete  pieces  of  capital  take  the  form  of 
ships,  docks,  warehouses  or  media  of  internal   commerce,  we 
speak  of  commercial  capital.     When  capital  is  applied  to  the 
processes  of  industry  in  the  narrower  sense,  we  speak  of  indus- 
trial capital.     From  one  point  of  view  the  same  object  may  be 
regarded  in  turn  as  industrial,  commercial  or  agricultural  cap- 
ital.    A  cart  may  be  constructed  in  a  factory  and  then  used  in 
the  industrial  operations  of  another  factory;  it  may  be  em- 
ployed by  a  merchant,  and  may  finally  be  sold  to  a  farmer  for 
use  on  the  farm,  serving  in  turn  as  industrial,  commercial  and 
agricultural  capital.     The  characteristic  feature  of  modern  life 
is  the  increasing  importance  of  industrial  capital. 

(3)  By  financial  capital  is  meant  not  so  much  the  concrete 
objects  as  the  fund  or  money  embodiment  of  the  agents  used 
in  financing  or  rendering  possible  economic  enterprises.     The 
surplus  from  any  economic  activity  may  be  stored  up   in   the 


316  Capital.  [§  i38 

shape  of  jewelry  or  of  coins ;  and  this  surplus  wealth  is  the 
financial  capital  which  may  at  any  moment  be  devoted  to  pro- 
ductive enterprise.  In  modern  times  the  surplus  is  put  not 
only  into  money,  but  into  all  kinds  of  paper  and  credit  repre- 
sentatives. Financial  capital  on  a  large  scale  has  been  in  turn 
a  handmaid  to  each  form  of  economic  activity.  In  the  later 
days  of  classic  Rome  financial  capital  was  closely  connected 
with  land,  the  slaves  being  the  important  form  of  capital.  In 
the  developed  economy  of  the  Orient,  as  well  as  in  the  later 
middle  ages,  financial  capital  was  intimately  related  to  com- 
merce ;  the  bankers  were  the  merchant  princes.  In  modern 
times  financial  capital  is  more  and  more  associated  with  in- 
dustry :  the  "  industrials "  are  fast  gaining  even  on  the  rail- 
way or  banking  securities.  Modern  capital  is  predominantly 
industrial  capital. 

138.     Function  of  Capital. 

The  aim  of  all  economic  activity  is  to  secure  a  surplus  by 
augmenting  utilities  and  diminishing  costs.  Production  affects 
surplus  in  both  ways,  —  it  increases  the  stock  of  economic 
goods,  or  decreases  the  cost.  Sometimes  it  accomplishes 
both  results.  Capital  as  an  agent  of  production  is  an  efficient 
help  in  this  process. 

The  productivity  of  capital  consists  in  the  aid  which  it  ren- 
ders in  securing  the  same  results  with  less  effort.  It  is  an 
adjunct  to  human  labor,  and  to  that  extent  lessens  labor  by 
interposing  something  between  labor  and  its  result.  The 
function  of  capital  might  therefore  be  called  the  roundabout 
method  of  production.  If  we  need  water,  we  can  go  to  the 
stream  each  time  and  bring  the  water  in  our  hand,  or  we  can 
devote  some  of  our  labor  to  constructing  a  pump.  While  we 
are  making  the  pump  we  are  losing  time  and  energy,  but  when 
it  is  finished  there  will  soon  be  an  appreciable  net  saving  or 
surplus  of  utility  over  cost.  Instead  of  applying  our  labor 
directly  to  the  stream  we  interpose  the  piece  of  capital  known 
as  a  pump.  The  pump  not  only  pays  for  itself,  but  leaves  a 


§138]  Function  of  Capital.  317 

surplus,  which  can  HOW  be  transmuted  into  further  wealth. 
Capital,  then,  is  productive  in  the  same  sense  as  labor.  It  is 
not  indeed  the  cause  of  value  any  more  than  labor  is  the 
cause  of  value.  But  when  labor  brings  about  an  increased 
net  surplus  of  utility,  we  call  it  productive ;  and  when  capital 
does  the  same,  it  also  is  productive.  If  the  pump  does  not 
work,  that  is,  does  not  increase  the  surplus,  it  will  have  no 
value,  neither  rental  value  nor  capital  value  ;  and  since  it  has  no 
capital  value  it  will  not  form  a  part  of  the  aggregate  of  things 
which  are  represented  by  the  fund  of  capital.  But  if  it  does 
work,  that  is,  if  it  is  really  capital,  it  is  productive  because  it 
produces  a  net  surplus  over  and  above  what  would  have  been 
produced  by  unaided  labor. 

The  statement  that  capital  works  through  the  roundabout 
method  of  production  is,  however,  liable  to  misunderstanding. 
In  one  sense  indeed  the  interposition  of  capital  lengthens  the 
period  of  production.  In  former  days  the  cobbler  made  the 
shoe  or  the  blacksmith  the  chain,  and  turned  it  over  almost  at 
once  to  the  consumer ;  nowadays  a  long  period  intervenes  be- 
tween starting  the  manufacture  of  a  particular  shoe  or  chain 
and  its  final  delivery  to  the  consumer.  The  process  of  the 
successive  combination  and  division  of  labor  has  been  brought 
to  its  highest  efficiency  by  the  employment  of  capital.  Capital 
is  needed  for  securing  the  raw  material  in  large  quantities,  for 
providing  the  factory  or  mill  and  the  machinery,  for  the  pay- 
ment of  the  various  classes  of  laborers,  for  the  warehousing  of 
the  product  and  for  its  distribution  to  the  retailer.  The  greater 
the  participation  of  capital,  the  more  roundabout  is  the  process. 

On  the  other  hand,  a  single  process  or  a  definite  part  of 
a  process  can  obviously  be  finished  far  more  rapidly  by  a 
machine.  The  substitution  of  capital  for  labor,  that  is,  the 
replacement  of  a  hand  by  a  machine,  means  the  cutting  down 
of  the  time  of  technical  production.  We  thus  seem  to  face 
the  dilemma  that  capital  saves  time  and  loses  time,  that  it 
shortens  the  period  of  the  particular  process  and  yet  lengthens 
the  period  of  the  entire  process. 


318  Capital.  [§  138 

The  reconciliation  is  simple.  The  individual  machine  saves 
time,  but  to  create  the  machine  takes  time,  so  that  the  whole 
process,  counting  from  the  beginning  is  lengthened.  The 
machine  is  productive  because  it  turns  out  so  much  more  in 
quantity  that  the  value  of  the  entire  product  soon  yields  a 
surplus  over  the  expenditure  of  energy  put  into  the  machine. 
That  is,  from  the  point  of  view  of  aggregate  mass  production 
there  is  a  saving  of  time,  measured  in  terms  of  cost ;  from  the 
point  of  view  of  the  single  product  there  is  a  sacrifice  of  time, 
which  is  more  than  offset  by  the  fact  that  the  single  product  is 
now  only  an  insignificant  unit  in  the  mass.  The  value  of  the 
unit  is  a  proportionate  part  of  the  mass. 

In  another  sense,  finally,  the  ascription  of  the  roundabout 
process  to  capital  may  be  reversed.  If  we  regard  not  the 
particular  piece  of  capital,  but  the  fund  of  capital  in  general, 
we  may,  on  the  contrary,  say  that  capital  brings  labor  and  con- 
sumption together.  In  a  large  shoe  factory,  for  instance,  it 
takes  time  to  make  each  shoe ;  but  at  any  given  moment  the 
raw  material  is  coming  in  at  one  end  and  the  shoe  is  finished 
at  the  other  end.  Formerly  the  cobbler  made  one  shoe  and 
then  began  on  another;  now  at  the  same  instant  shoes  are 
begun  and  shoes  are  finished.  The  function  of  capital  as  a 
productive  fund  is  therefore  really  to  synchronize  labor  and 
consumption.  The  individual  pieces  of  capital  separate  labor 
and  consumption ;  the  fund  of  capital  brings  them  together. 
They  are  two  aspects  of  the  same  thing,  just  as  division  of 
labor  and  combination  of  labor,  seemingly  the  opposites,  are, 
as  we  know,  really  two  sides  of  the  same  process.  To  give  a 
familiar  illustration,  it  is  like  the  reservoir  of  water  used  to  run 
a  mill ;  the  individual  drops  come  in  at  one  end  and  go  out 
at  the  other,  but  the  water  remains  at  the  same  level  and 
exerts  its  force  as  a  mass  of  united  drops.  The  individual 
pieces  of  capital  form  the  final  enjoyment ;  capital  as  a  whole 
permanently  invested  unites  them.  In  one  sense  capital  in- 
volves a  roundabout  or  individual  process ;  in  another  sense 
it  implies  the  most  direct  of  processes. 


§  139]    Creation  and  Growth  of  Capital.      319 

139.   Creation  and  Growth  of  Capital. 

The  root  idea  in  the  conception  of  capital  is  that  of  a 
surplus.  In  order  for  anything  to  have  a  capital  value  there 
must  be  a  surplus  of  inchoate  uses.  If  the  fibre  in  an  electric 
light  bulb  wears  out,  the  bulb  possesses  no  further  reserve  uses 
and  loses  its  capital  value.  Again,  if  we  labor  simply  to  pro- 
vide for  our  fleeting  wants  and  consume  all  that  we  produce, 
there  remains  at  the  close  of  each  production  period  no 
surplus.  The  surplus  energy  which  'is  transmuted  into  pieces 
of  capital  therefore  comes  ultimately  from  the  decision  of  the 
individual  to  postpone  present  gratifications.  If  instead  of 
taking  the  water  directly  from  the  stream  we  elect  to  spend 
our  time  in  constructing  a  pump,  we  are  creating  a  piece  of 
capital.  The  only  way  in  which  capital  can  be  formed  is  at 
bottom  by  saving,  by  waiting,  by  forbearing. 

The  creation  of  new  capital  is  therefore  the  result  of  pru- 
dence and  forethought.  The  habit  of  saving,  that  is,  of  subor- 
dinating the  present  to  the  future,  is  an  essential  characteristic 
of  progress.  Primitive  peoples  are  spendthrift,  —  they  have 
no  thought  of  the  morrow  and  lay  by  nothing.  There  is  no 
accumulation  of  capital.  Where  the  provision  of  immediate 
needs  occupies  the  whole  of  one's  time,  there  is  no  opportunity 
of  developing  those  higher  qualities  that  make  for  civilization. 
The  formation  of  a  continually  growing  surplus  involves  the 
saving  of  energy  and  the  liberation  of  human  efforts  from  the 
pressing  needs  of  mere  material  existence.  The  growth  of 
capital  means  the  advance  of  civilization,  because  it  implies 
more  efficient  labor,  the  growth  of  leisure  and  the  freedom 
to  turn  attention  to  the  scientific,  aesthetic  and  ethical  aims  of 
life.  The  destruction  of  capital,  as  in  the  later  days  of  the 
Roman  empire,  spells  a  decay  of  civilization,  because  with  the 
weakening  of  the  economic  foundation  the  whole  superstruc- 
ture is  bound  to  fall.  The  growth  of  capital  is  in  itself  indeed 
not  sufficient  to  engender  the  highest  form  of  civilization,  but 
it  is  a  fundamental  prerequisite.  Not  all  wealthy  communities 


320  Capital.  [§  139 

have  been  civilized  in  the  best  sense,  but  there  has  never  been 
great  art,  great  literature,  or  great  science  except  when  there 
has  been  an  abundance  of  capital. 

To  say  that  capital  is  the  result  of  saving  or  forbearance  does 
not  necessarily  imply  any  moral  approbation  of  the  owner  of 
capital.  It  is  for  this  reason  that  it  is  unwise  to  speak,  as  many 
do,  of  abstinence  or  sacrifice  as  the  cause  of  capital  growth. 
A  man  who  already  possesses  an  income  large  enough  to  satisfy 
his  daily  wants,  be  they  great  or  small,  cannot  do  anything  else 
with  his  surplus  except  to  save  it,  and  thus  lead  to  the  forma- 
tion of  fresh  capital.  If  he  is  a  maniac,  he  can  of  course 
physically  destroy  it  or  the  money  represented  by  it  j  and  if  he 
is  a  fool,  he  can  put  the  capital  to  such  stupid  and  unproductive 
uses  that  it  will  soon  become  worthless  and  disappear  as  an 
embodiment  of  value.  But  unless  he  wastes  capital  in  these 
crude  ways,  he  cannot  help  saving.  He  does  not  abstain  from 
any  present  gratification,  because  this  capital  is  a  surplus  above 
all  present  gratifications.  Abstinence  here  means  abstinence 
from  senseless  waste ;  it  is  a  negative,  not  a  positive,  merit. 
Nor  does  he  sacrifice  anything.  As  we  shall  see  later  in  dis- 
cussing the  question  of  interest,  the  problem  is  one  of  marginal 
forbearance,  that  is,  of  sacrifice  at  the  margin  where  he  must 
choose  between  consumption  and  saving.  The  richer  a  man 
is,  the  more  remote  is  the  margin  where  he  will  have  to  decide. 
The  saving  of  one  dollar  means  something  very  different  to  a 
millionaire  and  to  a  day  laborer.  The  essential  point  to  re- 
member is  that  capital  is  a  surplus,  and  that  the  stock  of  capital 
can  be  augmented  only  by  an  excess  of  production  over  con- 
sumption. The  excess  can  be  formed  only  by  forbearance 
or  postponement,  but  the  forbearance  is  based  on  the  expecta- 
tion of  increased  income.  There  is  no  ethical  merit  attach- 
ing to  the  individual,  although  the  social  consequences  are 
advantageous. 

It  might  be  objected,  finally,  that  if  we  buy  a  railway  share  or 
a  piece  of  land  which  doubles  in  value  during  the  year,  there 
is  an  increase  of  capital  without  any  waiting.  In  reality,  how- 


§  140]  Nature  and  Influence.  321 

ever,  the  share  rises  in  value  because  it  represents  an  increased 
earning  capacity,  owing  to  the  fact  that  the  railway  is  now 
doing  more  business,  that  is,  adding  more  value  to  the  com- 
modities it  transports,  or,  in  other  words,  creating  surplus 
wealth.  If  the  corporation  elected  to  waste  the  surplus  by 
squandering  it  in  extravagant  salaries  or  palatial  private 
cars  there  would  be  no  excess  available  for  dividends,  and  no 
rise  in  the  price  of  the  security.  In  the  same  way  the  in- 
crease in  the  value  of  the  land  means  that  there  are  more 
individuals  who  have  accumulated  capital  and  who  either  need 
the  land  themselves  or  employ  the  other  human  beings  that 
are  thus  enabled  to  pay  for  the  use  of  the  land.  In  every  case 
the  increase  of  capital,  that  is,  the  creation  of  fresh  capital 
or  capital  value,  implies  an  increased  productivity,  or  a  sur- 
plus somewhere.  Whether  the  individual  owner  of  capital  is 
always  entitled  to  the  particular  surplus  is  quite  another 
question. 

Capital,  then,  is  the  available  stock  of  existing  wealth.  If  a 
part  of  this  stock  is  consumed  and  not  replaced,  capital  is 
diminished ;  if  it  is  not  only  replaced,  but  so  used  as  to  bring 
about  an  increase,  this  surplus  is  the  new  capital.  The  only 
way  to  increase  capital  is  to  refrain  from  the  waste  or  immedi- 
ate consumption  of  product.  The  greater  the  existing  stock  of 
capital,  the  easier  is  it  for  the  individual  or  the  community  to 
make  this  election.  The  increase  of  capital  is  therefore  in  last 
resort  due  to  the  growth  of  intelligence.  Where  science  gives 
an  increasing  mastery  over  nature,  the  problem  of  production 
through  the  growth  of  capital  resolves  itself  into  the  intelligent 
selection  of  such  things  as  are  wanted  by  society,  that  is,  to  the 
formation  of  a  constantly  growing  surplus  of  wealth. 

140.  Nature  and  Influence  of  Capital. 

Capital,  as  a  socially  important  factor,  is  to-day,  as  we  have 
seen,  industrial  capital.  Ours  is  called  the  capitalist  age,  not 
because  capital  was  unknown  before,  but  because  industry  is 
permeated  through  and  through  with  capitalist  qualities.  Capi- 


322  Capital.  [§  140 

tal  on  a  small  scale,  consisting  of  a  little  surplus,  was  devoted 
to  production  almost  from  the  beginning  of  civilization.  Cap- 
ital on  a  large  scale  was*  amassed  in  the  agricultural  and 
commercial  enterprises  of  antiquity.  Under  the  economic 
conditions  which  made  for  slavery  and  handicrafts,  however, 
there  was  no  opportunity  to  employ  capital  on  a  large  scale  in 
industry ;  and  with  the  decreasing  profitableness  of  slavery  and 
the  gradual  restriction  of  the  commercial  frontier,  as  in  later 
Rome,  capital  itself  began  to  dwindle  until  the  whole  economic 
and  political  structure  collapsed. 

After  many  centuries,  capital  was  again  accumulated,  first 
out  of  the  surplus  of  mediaeval  agriculture,  and  then  at  a  more 
rapid  rate  out  of  the  profits  of  the  new  commerce.  The  open- 
ing up  of  the  world  market  in  the  eighteenth  century  made 
possible  the  application  of  this  surplus  to  industry.  From  that 
time  begins  the  prodigious  increase  of  capital  which  charac- 
terizes modern  life.  Now  for  the  first  time  the  real  productive 
force  of  capital  is  realized.  The  surface  of  the  earth  is  a  fixed 
quantity ;  a  commerce  based  on  agriculture  and  the  products 
of  hand  labor  can  never  transcend  certain  well-defined  bounds. 
But  the  multiplication  of  commodities  into  the  value  of  which 
the  raw  materials  enter  as  a  minor  factor  is  limited  only  by  our 
failure  to  unlock  the  mysteries  of  nature.  Modern  science, 
modern  technique,  modern  capital,  are  enabling  us  to  explore 
the  innermost  recesses  of  this  unknown  world  and  to  convert 
it  to  industrial  uses. 

Modern  capital  is  therefore  primarily  industrial  capital,  and 
since  the  factory  is  the  type  of  modern  industry,  the  capitalist 
system  may  be  called  the  factory  system.  There  is  indeed 
also  a  capitalist  agriculture,  but  the  characteristic  features  of 
this  are  borrowed  from  capitalist  industry.  Industrial  capital 
may  be  taken  as  the  type. 

The  factory  system  is  sometimes  called  the  machine  system. 
This  is  not  strictly  correct.  In  a  modern  chemical  factory,  for 
instance,  there  may  be  few  or  no  machines  at  all.  What  must 
always  be  present,  however,  in  a  factory  is  some  form  of  auto- 


§  140]  Nature  and  Influence.  323 

matic  action,  replacing  hand  labor,  whether  that  action  is  due 
to  forces  of  nature  operating  directly  upon  raw  materials,  or 
indirectly  through  the  medium  of  a  machine.  For  all  practi- 
cal purposes,  however,  the  machine  may  be  regarded  as  the 
type. 

Industrial  capital   in  this  sense   discloses  three  characteris- 
tics, —  mass  production,  uniformity  and  interchangeability. 

(1)  Capital  becomes  profitable  only  when  there  is  a  mass 
production.     The    supersession    of    hand    by    machine    labor 
involves  such  an  enormous  multiplication  of  output  that  the 
product  must  now  be  sold  en  masse.     The  cotton  print  will 
ultimately  go   to    the    individual    consumer,    but    the   factory 
owner  must  count  upon  the  wholesaler  taking  his  entire  prod- 
uct of  a  day,  a  week  or  a  season.     Even  if  the  factory  owner 
retails  the  goods,  as  for  instance  with    the  Tobacco  Trust  or 
certain  shoe-dealers,  he  must  control  enough  shops  to  take  his 
whole  output. 

(2)  Industrial    capital    implies    uniformity   of    production. 
Hand  labor  gives  free  rein  to  the  individuality  of  the  pro- 
ducer ;  each  pair  of  shoes  the  cobbler  turns  out  may  differ  in 
some  respect  from  its  predecessor,  and  may  be  prized  on  that 
account.     A  machine  turns  out  the  same  thing  day  after  day, 
and  the  advantages  of  specialization  and  co-operation  are  de- 
rived chiefly  from  this  continual  repetition.     Things  are  made 
according  to  fixed  types,  forms  or  standards.     Hence  there  is 
sometimes  used  the  term  standardization  of  industry.     What  is 
meant  is    the  uniformity,  —  the  uniform  repetition  and    pro- 
duction of  the  same  type.     Great  as  has  been  the  ingenuity 
expended  in  differentiating  machinery,  the  result  has  been  only 
a  moderate  multiplication  of  types,  but  little  differentiation  of 
the  individual  products  within  each  type.     There  are  indeed 
different  kinds  of  hats  and  keys,  but  one  Knox  hat  is  almost 
like  another,  and  one  Yale  key  almost  like  its  thousands  of 
fellows. 

(3)  Industrial  capital  also  denotes  interchangeability.    Capi- 
talist  division  of  labor  means  that  all  complex  products  are 


324  Capital.  [§  141 

made  in  minute  portions.  Through  the  very  fact  of  uniformity, 
one  unit  is  as  good  as  another  of  the  same  class,  and  may  be 
used  interchangeably.  If  some  particular  thing  breaks  in  a 
bicycle  or  a  locomotive,  it  can  be  duplicated  at  once  and  at  a 
minimum  of  cost.  The  system  of  interchangeable  parts  is 
applied  to-day  even  to  such  products  as  vast  bridges  and  co- 
lossal steamers.  Interchangeability  is  a  corollary  of  uniformity 
and  of  mass  production.1 

The  deeper  social  influence  of  capital  is  visible  in  these 
characteristics.  Modern  life  means  greater  uniformity.  We 
dress  alike,  we  eat  alike,  we  speak  alike,  we  think  alike. 
Through  capital  we  are  becoming  citizens  of  the  world. 
Old  prejudices  are  destroyed  at  every  turn,  religious  and 
racial  antipathies  diminish,  local  and  even  national  boundaries 
are  overstepped.  Side  by  side  with  these  advantages  appear 
the  dangers.  The  levelling  is  undoubted,  but  if  not  carefully 
guarded  against  it  may  become  a  levelling  down  instead  of 
up.  Uniformity  is  preferable  to  eccentricity  and  vagaries, 
but  a  uniformity  of  mediocrity  is  to  be  deprecated.  The  real 
hope  and  strength  of  the  ifactory  system  are  that  industrial 
capital  will  so  reduce  cost  and  increase  the  surplus  of  the  in- 
dividual as  to  enable  him  to  devote  it  to  the  higher  ends 
which  make  for  progress. 

141.   Investment  of  Capital. 

When  we  speak  of  the  investment  or  application  of  capital, 
we  mean  in  last  resort  the  utilization  of  the  concrete  things 
that  constitute  capital.  These  concrete  things  will  be  used  by 
the  alert  entrepreneur  only  as  long  as  they  yield  the  maximum 
returns  ;  whenever  something  new  promises  better  results,  it  will 
be  forthwith  substituted.  Perhaps  the  most  striking  fact  in  the 
incipient  lawsuit  of  a  few  years  ago  between  the  great  iron- 

1  This  is  explained  in  all  its  details  in  the  Tenth  Census  Report  on 
Power  and  Machinery  by  Professor  Trowbridge,  who  classifies  machine 
tools  into  those  acting  by  compression,  shearing,  paring,  milling,  abrad- 
ing, grinding  and  sawing. 


§  141]  Investment  of  Capital.  325 

masters,  Carnegie  and  Frick,  was  the  revelation  of  the  readi- 
ness with  which  the  former  threw  into  the  scrap  heap  machinery 
almost  new,  costing  millions,  as  soon  as  a  notable  improvement 
had  been  perfected.  This  seeming  destruction  of  capital  on  an 
immense  scale  was  in  reality  an  increase,  profitable  alike  to  the 
producer  and  the  public.  All  physical  investment  of  capital  is 
the  application  of  new  commodities  to  replace  the  old.  The  old 
need  not  be  actually  worn  out ;  it  is  sufficient  that  it  should 
have  lost  its  relative  productivity. 

Under  modern  business  conditions  the  investment  of  capital 
is  put  back  a  stage,  and  becomes  the  financial  investment, 
which  renders  possible  the  ultimate  physical  utilization.  Cap- 
ital is  invested  as  a  fund,  to  be  later  transmuted  into  concrete 
things.  Herein  lies  the  significance  of  the  modern  corpora- 
tion. Through  the  medium  of  corporate  securities  a  fund  of 
capital  is  made  mobile  and  active.  The  purchase  by  the 
public  of  a  new  industrial  security  means,  if  the  enterprise  is 
honestly  and  ably  financed,  that  the  proceeds  will  ultimately 
take  the  shape  of  plant  or  working  capital,  that  is,  of  realized 
earning  capacity.  The  function  of  the  promoter,  the  banker 
and  the  underwriting  syndicate  is  at  bottom  legitimate  and 
productive.  If  the  physical  investment  of  capital  is  desirable, 
the  financial  machinery  through  which  this  end  is  attained  is 
similarly  productive.  It  often  requires  far  more  ability  to  raise 
the  necessary  funds  at  the  lowest  rate  than  to  turn  out  the 
finished  product  at  the  lowest  cost.  Both  investor  and  con- 
sumer may  in  the  end  derive  more  benefit  from  the  successful 
financial  "  deal "  than  from  the  best  technical  operation  of  the 
industry.  The  control  of  modern  finance  over  vast  masses  of 
capital  indeed  makes  possible  its  manipulation  for  illegitimate 
ends  on  a  gigantic  scale.  But  these  abuses  must  not  blind  us 
to  the  essentially  productive  character  of  the  services  of  the 
financiers  as  the  intermediaries  between  financial  and  indus- 
trial capital. 

Since  the  ownership  of  the  concrete  pieces  of  capital  is 
coming  more  and  more  to  be  represented  by  these  corporate 


326  Capital.  [§  141 

securities,  their  character  becomes  of  considerable  importance. 
Technically  they  are  divisible  into  stocks  and  bonds.  The 
share  of  stock  represents  legally  the  proportionate  part  of 
ownership  in  the  corporate  property  or  assets.  When  there 
are  no  bonds,  the  stock  is  entitled  to  all  the  profits.  Some- 
times the  stock  is  divided  into  preferred  and  common  shares, 
and  occasionally  we  find  a  further  variety  known  as  cumulative 
stock,  so  called  because  the  dividends  are  allowed  to  accumu- 
late to  a  certain  amount  before  becoming  payable.  Opposed 
to  the  stock  is  the  bond ;  the  property  of  the  corporation  is 
mortgaged  to  the  bondholders,  who  receive  interest  on  the 
bond  until  the  expiration  of  the  mortgage.  If  there  is  any  de- 
fault in  the  interest,  the  property  covered  by  the  mortgage  can 
be  sold  to  satisfy  the  debt.  In  England,  where  mortgage 
bonds  are  unknown,  their  place  is  taken  by  the  debenture 
stock,  the  difference  being  that  the  holder  has  the  right,  in 
case  of  default,  to  reimburse  himself  by  levying  upon  some 
item  of  the  company's  property.  Bonds  are  first,  second, 
third  or  further  mortgage  bonds  according  to  the  priority  of 
the  lien.  Where  a  rate  of  interest  is  contingent  upon  earnings, 
the  bond  is  an  income  bond.  Sometimes  the  bonds  are 
convertible  into  stock,  and  hence  called  convertible  bonds. 
When  smaller  corporations  are  merged  into  a  larger  one  or 
when  a  corporation  seeks  to  avoid  mortgaging  its  own  prop- 
erty, the  original  bonds  are  put  in  trust  as  collateral,  and 
a  new  issue  is  made  under  the  name  of  collateral  trust 
bonds  or  simply  trust  bonds.  Although  such  an  issue  is 
not  legally  a  mortgage,  it  is  so  practically,  since  recourse  can 
always  be  had  through  foreclosure  to  the  underlying  mortgage 
securities. 

In  legal  theory  the  stock  represents  the  ownership,  and  the 
bond  a  limited  interest  in  the  enterprise.  In  actual  fact,  under 
recent  financial  development,  where  the  original  cost  or  outlay 
is  often  defrayed  out  of  the  proceeds  of  the  mortgage  indebt- 
edness, the  stock  has  come  to  represent  the  speculative  interest 
in  the  venture,  while  the  bond  represents  the  actual  proprietor- 


§  i4i]  Investment  of  Capital.  327 

ship.  This  economic  reversal  of  the  legal  situation  is  most 
clearly  marked  in  the  railways,  but  is  also  visible  in  ordinary 
industrial  enterprises.  As  a  consequence  there  has  frequently 
developed  an  antagonism  of  interest,  not  only  between  bond- 
holder and  stockholder,  but  also  between  the  main  body  of 
investors  and  the  directorate.  In  some  States  the  issue  of 
bonds  is  restricted  to  a  proportion  of  the  stock  or  of  the  prop- 
erty, or  otherwise  limited  ;  in  other  cases  the  bondholders  are 
given  voting  power;  in  still  other  instances  the  principle  of 
minority  representation  is  introduced  to  safeguard  the  interests 
of  the  stockholders.  The  English  law  of  1900  and  the  recent 
Massachusetts  law  are  perhaps  the  most  advanced  examples 
of  Anglo-Saxon  legislation  to  protect  the  varying  interests  of 
different  classes  of  investors. 

The  proper  method  of  managing  the  investment  in  vast  cor- 
porate enterprises  has  assumed  such  importance  that  it  has  well- 
nigh  become  a  separate  discipline,  under  the  name  of  corporate 
finance.  It  includes  such  topics  as  accounting,  the  issue  and 
marketing  of  securities,  the  funding  policy,  the  accumulation  of 
surplus  and  reserves,  and  many  more.  In  a  comprehensive 
treatise  on  economics  these  would  all  need  explanation.  They 
must  here  be  passed  over  with  a  mere  mention.  The  influence 
of  the  proper  investment  of  capital  is  by  no  means  confined  to 
the  investor.  Primarily  indeed  he  seems  to  be  affected.  He 
must,  however,  be  regarded  as  the  channel  through  which 
society  as  a  whole  increases  its  fund  of  capital  and  its  resulting 
control  of  nature.  The  investor,  as  opposed  to  the  reckless 
speculator,  is  as  effectively  an  agent  of  society  as  any  individ- 
ual producer.  The  one,  like  the  other,  may  think  that  he  is 
pursuing  his  own  interest,  but  he  will  generally  also  be  sub- 
serving the  common  interest.  If  the  producer  turns  out  some- 
thing that  the  community  really  wants,  he  will  benefit  society 
as  well  as  himself;  if  the  investor  exercises  sagacity  in  the  ap- 
plication and  control  of  his  investment,  he  will  tend  to  save 
the  community  the  risk  of  misdirected  energy  and  the  wastes 
of  failure. 


328  Capital.  [§  141 

The  proper  financial  control  of  the  fund  of  capital  is  no  less 
important  than  the  proper  application  of  the  concrete  pieces 
of  capital  to  industry,  trade  or  agriculture.  Upon  the  econo- 
mic investment  of  capital,  in  the  broadest  sense,  depends  in 
large  measure  the  prosperity  of  all  classes. 


CHAPTER   XXII. 
ENTERPRISE  — THE   CONCENTRATION  OF   PRODUCTION. 

142.  References. 

W.  Z.  Ripley  (ed.),  Trusts,  Pools  and  Corporations  (1905) ;  J.  W.  Jenks, 
The  Trust  Problem  (1900) ;  R.  T.  Ely,  Monopolies  and  Trusts  (1900)  ; 
H.  W.  Macrosty,  Trusts  and  the  State  (1901);  J.  Moody,  The  Truth 
about  the  Trusts  (1904) ;  E.  I.  Nolan,  Combinations,  Trusts  and  Monopolies 
(1904);  J.  E.  Le  Rossignol,  Monopolies,  Past  and  Present  (1901) ;  J.  B. 
Clark,  Control  of  Trusts  (1901) ;  A.  Marshall,  Principles  of  Economics 
(1898),  bk.  iv,  chs.  x,  xi ;  E.  S.  Meade,  Trust  Finance  (1903),  ch.  iii; 
Chicago  Conference  on  Trusts  (1899);  Utiited  States  Twelfth  Census,  VII, 
Summary  and  Analysis  of  Residts  (1900);  United  States  Industrial  Com- 
mission, Report,  I,  II,  XVIII,  XIX,  595-722;  Ida  Tarbell,  History  of  the 
Standard  Oil  Company  (2  vols.,  1904)  ;  J.  A.  Wilgus,  Study  of  the  United 
States  Steel  Corporation  (1901) ;  S.  Sherwood,  Function  of  the  Undertaker 
(Yale  Rev.,  VI,  1898) ;  H.  R.  Mussey,  Combination  in  the  Mining  Indiis- 
try  (Columbia  Studies,  XXIII,  1905);  W.  E.  Belcher,  Industrial  Pooling 
Agreements  (Quart.  Jour.  Econ.,  XIX,  1905) ;  H.  W.  Quaintance,  In- 
fluence of  Farm  Machinery  on  Production  and  Labor  (Am.  Econ.  Assoc. 
Publications,  3d  series,  V,  1904) ;  Trusts  and  Trade  Combinations  in 
Eiirope  (United  States  Consular  Reports,  1900) ;  F.  Walker,  Monopolistic 
Combinations  in  the  German  Coal  Industry  (Am.  Econ.  Assoc.  Publications, 
3d  series,  V,  1904)  and  The  Law  concerning  Monopolistic  Combinations 
in  Continental  Europe  (Pol.  Sci.  Quart.,  XX,  1905). 

143.   The  Meaning  of  Concentration. 

Enterprise  is  in  one  sense,  as  we  have  seen  (§  121),  a  spe- 
cies of  labor.  In  reality,  however,  it  has  come  to  mean  that 
kind  of  labor  which  is  carried  on  independently  instead  of  for 
a  stipulated  reward.  Strictly  speaking,  it  is  not  identical  with 
management,  for  the  manager  of  a  business  may  be  hired  at  a 
definite  salary.  Enterprise  is  management  plus  risk ;  that  is, 
it  involves  the  independent  conduct  of  a  business,  with  all  the 

329 


330  Enterprise.  [§  143 

chances  of  profit  or  loss.  We  have  already  discussed  the  his- 
torical forms  of  enterprise  (Chap.  VI).  In  modern  times  the 
pre-eminent  fact  of  business  enterprise  is  the  tendency  to 
concentration.  A  study  of  modern  business  enterprise  thus 
becomes  virtually  a  study  of  concentration. 

In  approaching  the  problem  of  concentration,  we  must 
distinguish  between  the  concentration  of  wealth,  the  concen- 
tration of  production  and  the  monopoly  of  production.  Con- 
centration of  wealth  is  essentially  an  individual  phenomenon 
in  the  sense  that  any  one  may  acquire  wealth  from  indepen- 
dent and  relatively  insignificant  sources.  A  rich  landlord  may 
own  a  large  number  of  small  tracts ;  a  wealthy  capitalist  may 
secure  his  returns  from  many  investments  in  minor  enterprises. 
Concentration  of  production,  on  the  other  hand,  means  either 
that  the  units  themselves  are  increasing  in  size  as  in  the  case 
of  larger  farms  or  factories,  or  that  they  are  combined  with 
other  units  under  more  or  less  centralized  management,  as  in 
the  case  of  enterprises  technically  separate,  but  subject  to  the 
same  financial  control.  Where  an  individual  owns  the  produc- 
tive factors,  concentrated  production  involves  concentrated 
wealth ;  where  the  business  enterprise  assumes  a  corporate 
form,  concentrated  production  is  compatible  with  a  diffusion 
of  wealth  among  the  security  holders. 

Concentration  of  production,  again,  is  not  necessarily  a  mo- 
nopoly of  production.  The  size  of  the  units  may  increase,  but 
there  may  still  be  rivalry  between  them.  Bonanza  farms, 
department  stores  and  great  corporations,  each  representing  an 
undoubted  concentration  of  production,  may  yet  suffer  keen 
competition  from  their  rivals.  It  is  only  when  concentration 
has  reached  the  stage  where  a  single  business  enterprise  per- 
manently supplies  so  large  a  percentage  of  the  entire  output 
as  to  control  the  price  that  we  can  speak  of  a  virtual  monopoly. 
In  such  a  case  indeed  there  may  be  technical  competitors,  but 
the  competition  is  practically  inoperative. 

Concentration  of  production  may  be  predicated  of  each  of 
the  three  factors,  —  labor,  land  and  capital. 


§  144]  Large-Scale  Production.  331 

(1)  The  concentration  of  labor  as    an   independent    phe- 
nomenon is  not  important.     After  a  certain  low  limit  of  co- 
operation has  been  reached  the  profitableness  of  an  increased 
force  of  laborers  depends  on  the  acquisition  of  more  land  or 
the  utilization  of  more  capital.     Not  only  must  wages  be  ad- 
vanced, but  the  output  must  be  disposed  of.     For  these  and 
similar  purposes  capital  is  required.     Concentration  of  labor 
is  thus  dependent  upon  concentration  of  land  or  of  capital. 

(2)  Concentration  of  land  varies  with  the  kind  of  land.     In 
grazing  and  agricultural  land,  modern  economic  forces,  as  we 
shall  see  (§  145)  are  opposed  to  concentration  ;  so  far  as  it  exists, 
it  rests  upon  the  application  of  capital  to  land.     In  mineral  and 
forest  lands,  when  we  observe  a  tendency  toward  concentration 
it  will  often  be  found  that  as  in  the  case  of  iron,  coal  and  cop- 
per, the  product  forms  an  important  raw  material  for  closely 
related  industries,  and  that  the  land  concentration  is  a  result  of 
the  industrial  concentration.     Finally,  in  urban  lands,  whether 
the  sites  are  owned  in  large  or  in  small  plots  has  no  bearing 
on  the  price.     Thus,  while  the  concentration  of  land  may  be 
important  in  distribution,  it  is  as  a  factor  in  production  either 
non-existent,  insignificant  or  dependent  on  that  of  capital. 

(3)  Concentration  of  production  hence  resolves  itself  into 
concentration  of  capital  as    the  dominating  force.     Of   this, 
again,  there  are  two  categories,  —  large-scale  production  in  the 
narrower  sense  and  capitalist  consolidation  and  integration  in 
the  wider  sense.     Large-scale  production  is  the  result  of  the 
change  in  the  normal  business  unit  brought  about  directly  by 
modern  machinery.     Capitalist  consolidation  and  integration 
are  the  result  of  the  more  important  changes  effected  by  the 
application  of  great  masses  of  financial  capital  to  industry  and 
commerce  in  general.     Each  of  these  must  be  considered  in 

turn. 

144.   Large-Scale  Production. 

Large-scale  production  might  also  be  called  the  concentra- 
tion of  employment.  It  means  that  the  business  unit,  whether  a 
manufacturing  establishment,  a  commercial  enterprise  or  a  farm, 


332  Enterprise.  [§  144 

employs  a  large  amount  of  capital,  and  as  a  consequence  in  some 
cases  also  a  large  amount  of  labor  or  land.  The  ordinary  ex- 
ample is  that  of  the  modern  factory  contrasted  with  the  shop  or 
handicraft  system  of  former  times.  We  find  isolated  instances 
of  large-scale  industrial  production  in  earlier  ages,  but  with  the 
advent  of  machinery  it  has  become  the  type  instead  of  the 
exception.  Beginning  in  the  textile  industries  in  England  at 
the  close  of  the  eighteenth  century,  it  soon  spread  to  the  most 
important  trades,  although  there  still  exist  to-day  industries  in 
which  an  unequal  contest  is  being  waged  between  the  domes- 
tic and  the  factory  systems.  On  the  European  continent  the 
transition  came  somewhat  later,  and  in  Germany  to-day  the 
so-called  petty  industry  (Kleinbetrieb)  still  makes  a  respectable 
showing.  In  the  United  States,  although  we  find  a  beginning 
of  large-scale  industry  in  the  textiles  after  the  war  of  1812,  it 
was  not  until  after  1850  that  the  transition  from  the  hand 
trades  assumed  any  importance,  and  not  until  after  the  civil 
war  that  the  tendency  toward  concentration  into  large  estab- 
lishments became  very  marked. 

The  distinction  between  small-scale  and  large-scale  produc- 
tion is  not  precisely  equivalent  to  that  between  hand  trades 
and  manufactures.  The  building  trades  are  generally  put  in 
the  former  category,  and '  yet  they  are  often  conducted  on  a 
large  scale.  On  the  other  hand  the  factory  may  be  a  small 
one.  Out  of  512,254  establishments  reported  in  the  Twelfth 
Census,  215,814  represented  hand  trades.  In  32,382  of  these 
from  5  to  20  persons  and  in  7,773  over  20  persons  were  em- 
ployed. On  the  other  hand,  out  of  296,440  establishments, 
in  about  one-seventh  (41,687)  the  proprietor  was  the  only 
workman,  and  in  about  one-half  of  the  remainder  (125,890) 
the  number  of  employees  was  under  5.  Nevertheless  large- 
scale  production  may  be  declared  to  be  virtually  the  result  of 
the  factory  system  with  its  use  of  machinery,  its  mass  produc- 
tion and  its  standardization.  In  most  of  the  hand  trades,  like 
carpentry,  plumbing,  custom  tailoring  and  custom  boot-making, 
we  have  a  small-scale  production ;  while  the  building  trades 


§  i44]  Large-Scale   Production. 


333 


which  form  the  chief  exception  are  nowadays,  through  the  use 
of  machinery,  the  purchase  en  masse  of  raw  materials,  and  the 
employment  of  large  capitals  and  great  numbers  of  workmen, 
in  reality  more  akin  to  the  factory  system.  While  many  small 
factories  are  still  being  continually  started,  the  tide  is  setting 
strongly  toward  an  increase  in  the  size  of  the  unit. 

In  the  United  States  the  maximum  number  of  manufactur- 
ing establishments  in  many  branches  was  reached  in  1870; 
since  that  time  the  number  has  been  in  some  cases  actually 
diminished,  while  in  all  cases  the  average  capital  invested,  the 
number  of  employees  and  the  value  of  the  product  per  unit 
have  steadily  risen.  The  following  table  illustrates  the  great 
increase  of  large-scale  production  : 


Number  of 

Average  per  Establishment. 

Establish- 

Capital. 

Industries. 

ments. 

Number  of 
Workmen. 

Value  of  Product. 

1870. 

i  goo. 

1870. 

1900. 

1870. 

1900. 

1870. 

1900. 

Iron  and  Steel  .  . 

726 

668 

$161,523 

$858,371 

103 

i33 

$274,878 

$1,203,545 

Agricultural     Im- 

plements .  .  . 

2,076 

7iS 

16,780 

220,571 

12 

65 

25,080 

141,549 

Carpets  and  Rugs 

215 

133 

58>329 

334,205 

56 

214 

101,217 

362,349 

Woollen  Goods    . 

2,891 

i,o35 

34,  «84 

120,180 

28 

67 

53,755 

114,425 

7»569 

1,306 

8,076 

131,214 

5 

4° 

20,774 

156,231 

This  method  of  presentation  of  averages  fails  to  show  the  real 
significance  of  the  change,  as  it  includes  the  small  as  well  as  the 
large  factories.  If,  however,  the  number  of  workmen  is  taken 
as  an  evidence  of  concentration,  it  appears  that  a  little  oveu 
eight  per  cent  of  all  the  factories  reporting  employ  about 
seventy-five  per  cent  of  the  total  number  of  workmen.  In  a 
single  iron  and  steel  mill  in  Ohio  there  were  7,477  employees; 
in  a  cotton  mill  in  New  Hampshire,  7,268;  in  an  agricultural 
implement  factory  in  Illinois,  6,728;  in  an  electrical  supply 
factory  in  Pennsylvania,  6,318  workmen.  Moreover,  as  ap- 
pears from  the  preceding  table,  the  investment  of  capital  and 
the  value  of  the  output  increase  far  more  rapidly  than  the 
number  of  workmen.  The  head  of  a  steel  company  in  Pitts- 


334  Enterprise.  [§  145 

burg  recently  testified  that  in  order  to  construct,  equip  and 
manage  a  steel  plant  there  is  needed  an  investment  of  from 
twenty  to  thirty  millions  of  dollars. 

145.   Large-Scale  Agriculture. 

Where  agriculture  depends  chiefly  on  the  labor  of  the  farmer, 
aided  by  comparatively  primitive  implements,  the  size  limit  of 
profitable  farming  is  soon  reached.  In  the  middle  ages,  even 
with  co-operative  or  communal  farming,  the  prevalence  of  the 
three-field  system  restricted  the  size  of  individual  strips.  In 
more  modern  times  we  find  either  the  small  plots  of  the 
European  peasant  proprietor  or  the  somewhat  larger  tracts  of 
fresher  land  of  the  early  American  farmer. 

Farming  on  a  large  scale  becomes  possible  only  when  capi- 
talist methods  are  employed.  In  former  times  these  methods 
were  supplied  by  slavery,  as  in  the  latifundia  of  later  repub- 
lican Rome  and  in  the  ante-bellum  plantation  in  the  South. 
The  slave,  however,  was  to  all  intents  and  purposes  a  species 
of  capital  or  machinery  —  even  though  a  human  machine. 
When  slavery  disappeared,  a  new  era  of  small  farms  was 
ushered  in,  and  whatever  tendency  to  large-scale  fanning  is 
found  to-day  is  due  in  great  measure  to  the  application  of 
industrial  capital  in  the  shape  of  farm  machinery  and  capital- 
ist methods  of  transportation. 

The  home  of  farm  machinery  is  in  the  United  States.  Its 
coming  was  somewhat  later  than  in  the  case  of  the  other  more 
important  productive  enterprises.  Whitney's  cotton  gin  and 
Newbold's  cast-iron  plough  were  invented  at  the  close  of  the 
eighteenth  century,  but  it  is  only  since  the  civil  war  that  farm 
machinery  has  been  used  on  a  large  scale.  The  increase  in 
the  production  of  agricultural  implements  in  the  United  States 
is  illustrated  by  the  following  figures  :  1850,  $6,842,611 ;  1860, 
$20,831,904;  1890,  £81,271,651  ;  1900,  $101,207,428. 

In  the  large  farms  of  the  far  West  fifty-horse-power  traction 
engines  are  now  used  to  pull  at  one  season  a  train  of  great 
ploughs,  harrows  and  press  drills  for  planting,  and  at  another 


145]  Large-Scale  Agriculture. 


335 


immense  harvesting-machines,  automatic  rakers  and  threshers. 
In  the  Central  states  we  find  check-row  planters,  riding-ploughs, 
steam  corn  huskers  and  shelters,  mowing-machines,  potato 
planters  and  diggers,  manure-spreaders,  feed-choppers  and 
grinders  and  ditch- digging  machines  —  to  mention  only  a  few 
of  the  newer  implements.  The  saving  of  labor,  the  prodigious 
increase  of  output  and  the  lessening  of  cost  go  far  to  explain 
the  competition  of  American  farm  products  in  the  European 
markets,  despite  the  great  obstacle  of  distance. 

The  influence  of  machinery  in  increasing  wages,  shortening 
hours  of  work,  lightening  the  tasks  of  women  and  children  and 
raising  the  general  standard  of  life  of  the  farmer  as  well  as  of 
his  hands  is  so  universally  recognized  that  it  needs  no  statisti- 
cal proof  or  explanation.  What  interests  us  here  is  its  effect 
upon  the  size  of  farms. 

It  is  obvious  that  considered  by  itself  expensive  machinery 
becomes  profitable  only  when  applied  to  large  stretches  of  land. 
This  is  evident  from  the  following  table  giving  the  average 
number  of  acres  of  improved  land  per  farm  : 


1850. 

1860. 

1870. 

1880. 

1890. 

1900. 

United  States   .... 

78.0 

79.8 

71.0 

71.0 

78.3 

72.3 

North  Atlantic  Division 

69.3 

69.0 

68.3 

66.6 

64-3 

574 

South  Atlantic  Division 

120.9 

II5.6 

80.7 

56.1 

55-6 

47-9 

North  Central  Division 

61.0 

67.7 

69.7 

80.6 

95-8 

IOI.2 

South  Central  Division 

82.6 

89.7 

60.8 

56.2 

61.0 

48.3 

Western  Division      .     . 

51.8 

106.4 

I68.I 

185.9 

157-8 

iii.S 

In  the  North  Central  division,  the  chief  home  of  farm 
machinery,  the  increase  is  marked.  The  average  for  the  whole 
country,  however,  is  kept  down  by  two  facts.  First,  in  the 
Southern  states  machines  outside  of  the  cotton  gin  have 
hitherto  been  found  well-nigh  inapplicable,  and  the  old  slave 
plantations  have  been  gradually  broken  up.  Secondly  and  more 
important,  land  values  tend  to  rise  with  growing  prosperity. 


336 


Enterprise. 


[§  145 


A  given  capital  thus  represents  a  constantly  diminishing  acre- 
age, and  it  becomes  increasingly  profitable  to  apply  more 
labor  and  minor  machines  to  small  •  areas  rather  than  large 
capital  and  vast  machines  to  great  areas.  That  is,  we  have  a 
tendency  to  more  intensive  rather  than  large-scale  farming. 
The  final  consequence  is  a  resultant  between  the  two  forces  of 
growing  productivity  of  machinery  and  the  increase  of  land 
values. 

The  following  table  gives  the  average  size  of  the  entire  farm 
in  acres : 


1850. 

1860. 

1870. 

1880. 

1890. 

1900. 

United  States   .... 

2O2.6 

199.2 

153-3 

T33-7 

J36.5 

146.6 

North  Atlantic  Division 

1  1  2.6 

I08.I 

104.3 

97-7 

95-3 

96-5 

South  Atlantic  Division 

376.4 

352.8 

24I.I 

157-4 

133-6 

108.4 

North  Central  Division 

!43-3 

1397 

123.7 

121.9 

I33-4 

144-5 

South  Central  Division 

291.0 

321.3 

1944 

150.6 

144.0 

J554 

Western  Division      .     . 

694.9 

366.9 

336.4 

312.9 

324.1 

386.  t 

It  will  be  observed  that  up  to  1880  there  was  a  movement 
toward  smaller  farms.  Since  1880,  the  era  of  the  introduction 
of  machinery  on  a  large  scale,  the  forces  have  about  balanced 
each  other  in  the  North  Atlantic  and  South  Central  divisions, 
while  in  the  South  Atlantic  division  the  tendency  just  referred 
to  has  been  progressing,  even  though  during  the  past  few  years 
there  seems  to  be  a  new  and  slight  movement  toward  the  so- 
called  plantation  system,  or  large  farm  with  white  owner  and 
extensive  gangs  of  negro  farm  hands.  In  both  the  North 
Central  and  Western  divisions  not  only  has  the  use  of  machin- 
ery increased,  but  the  opening  up  of  vast  stretches  of  graz- 
ing land  has  contributed  to  increase  the  average  size  of  the 
farms.  With  the  growing  importance  of  land  values  the  trend 
in  the  West  may  be  expected  soon  to  conform  to  that  in  the 
East.  In  1900  over  82  per  cent  of  all  the  farms  were  under 
1 75  acres.  The  tendency  for  the  small  farms  to  increase  is 
shown  by  the  following  table  of  percentage  in  acres : 


§  146]      Consolidation  and  Integration.         337 


Under  10. 

IO-2O. 

20-50. 

50-100. 

100-500. 

500-1000. 

looo  and 
over. 

1880 

3-5 

7-i 

19-5 

25.8 

42.3 

1.9 

0.7 

1890 

3-3 

5-8 

19.8 

24.6 

44.0 

1.9 

0.7 

1900 

4-7 

6-3 

21.9 

23-8 

39-9 

1.8 

0.8 

The  same  movement  is  discernible  even  in  the  Western  and 
North  Central  divisions,  where,  notwithstanding  a  slight  increase 
in  the  largest  farms,  there  has  been  a  considerably  greater 
increase  in  the  smaller  farms.  The  conclusion  is  that  large- 
scale  production  is,  even  in  the  United  States,  far  less  appli- 
cable to  agriculture  than  to  industry,  chiefly  because  the  lower 
cost  resulting  everywhere  from  machinery  is  in  the  case  of 
agriculture  counterbalanced  by  the  increase  in  land  values 
and  the  consequent  changes  in  cultivation. 

146.   Consolidation  and  Integration  of  Production. 

Side  by  side  with  the  immediate  effects  of  machinery  in 
enlarging  the  size  of  the  individual  business  unit,  we  have  the 
broader  phenomenon  of  the  capitalistic  combination  of  produc- 
tion. This  is  of  two  kinds  :  first,  the  consolidation  of  like  units 
into  a  larger  whole,  as  in  the  union  of  separate  shipping  lines 
into  the  International  Marine  Company ;  and  second,  the  inte- 
gration of  unlike  units,  as  the  union  of  such  originally  different 
enterprises  as  mines,  transportation  companies,  factories  and 
mills  into  the  United  States  Steel  Corporation. 

Combinations  of  capital  have  gone  through  several  phases 
known  respectively  as  agreements,  pools  and  trusts,  each  being 
further  divisible  into  two  or  more  classes. 

(i)  The  earliest  form  is  the  agreement  of  independent 
concerns  to  fix  prices.  This  is  the  first  natural  effort  to  in- 
crease profits  by  restricting  competition.  It  is  found  almost 
from  the  beginning  of  business  enterprise.  Its  obvious  weak- 
nesses are  the  lack  of  any  adequate  penalty  to  prevent  under- 
cutting by  any  one  of  the  parties  to  the  agreement ;  and  the 


338  Enterprise.  [§  146 

Inducement  which  the  ensuing  high  profits  hold  out  to  new 
competitors.  In  the  American  railway  business  this  plan, 
whether  in  the  form  of  the  earlier'  traffic  arrangements  or  in 
that  of  the  more  recent  presidents'  agreements,  never  proved 
effectual.  In  general  industry  its  efficacy  is  limited  and 
doubtful. 

(2)  The    next    step  is  the   agreement  to   divide  the  field, 
each  enterprise  contracting  to  limit  its  activity  to  a  particular 
section.     This  plan  also  is  subject  to  difficulties  except  in  cases 
where  the  first  comer  possesses  undoubted  advantages  through 
the  mere  fact  of  priority.     The  most  familiar  examples  are  the 
American  express  companies  and  the  French  railways,  although 
even  here  there  is  some  competition    on  the  fringe  of  each 
field.     Division  of  the  field,  however,  is  in  most  cases  only  a 
stage  in  the  formation  of  a  closer  union,  as  in  the  so-called 
rival  gas  or  electric  light  companies. 

(3)  The  third  phase  is  the  pool,  or  the  attempt  to  restrict 
the  output  rather  than  the  price  or  the  field.     The  pool  is  so 
named  because  the  receipts  are  put  into  a  common  fund  or 
pool,  each  member  of  the  combination  having  an  allotted  per- 
centage of  production.1     Ordinarily  this  takes  the  form  of  a 
money  pool,  the  excess  or  deficiency  in  each  case  being  paid 
in  cash.     Occasionally,  as  in  some  of  the  railway  traffic-pools, 
the  output  itself  is   diverted   from   one   member  to  another. 
When  this  apportionment  is  accomplished  by  secret  favors  to 
individuals,  like  the  cattle,  hog  and  oil  "  eveners,"  the  abuses 
become    notorious.     Frequently    the    equilibrium    is    brought 
about  by  a  fine  on  the  excess  production,  instead  of  a  technical 
pooling  of  the    output    or    the    proceeds.     Here,  again,  the 
temptations    covertly  or   openly  to  exceed   the   allotment    in 
order  to  secure  greater  immediate  profits  or  to  furnish  an  argu- 
ment for  a  larger  percentage  at  the  next  distribution  is  fre- 
quently too  strong  to  be  resisted.     To  this  danger  the  whisky 
pool,  the  beam  pool  and  many  others  succumbed. 

1  The  industrial  pool  must  not  be  confused  with  the  financial  pool, 
used  for  speculative  purposes  in  the  stock  exchange. 


§146]       Consolidation  and  Integration.        339 

(4)  Sometimes  the   pool   combines  both   features,  the  fix- 
ing of  price  as  well  as  of  output.     Occasionally  it  goes  still 
further    and    under    the   name    of   selling    bureau    or    agency 
constitutes  a  fourth  phase.     The  selling  bureau  not  only  fixes 
prices  and  output,  but  often  manages  the  entire  business  of 
selling,  taking  all  orders  and  distributing  the  respective  allot- 
ments to  each  member.     Many  of  the  German  Cartells  are  of 
this  nature,  although  in  some  cases  they  are  nothing  but  ordi- 
nary pools.     Of  the  same  character    was  the   Michigan    Salt 
Association,  and  many  of  the   French  comptoirs  or  syndicats. 
The  weakness  of  the  pooling  arrangerrfents  is   not  only  their 
instability,  but  also  the  fact  that  in  Anglo-Saxon  countries  at 
least  their  provisions  are  unenforceable  because  repugnant  to 
the  common  law. 

(5)  The  fifth  stage  was  reached  in  1882  by  the  formation 
of  the  Standard  Oil  Trust,  so  called  because  the  constituent 
enterprises  turned  over  their  business  to  a  board   of  central 
trustees,  receiving  in  return  trust  certificates  and  abandoning  to 
the  "trust"  the  entire  operation  of  the  business.1     Although 
the  whisky,  the  sugar  and  other  trusts  rapidly  followed,   the 
scheme  was  soon  found  to  conflict  with  the  law,  the  original 
trusts  were  dissolved,  and  the  constituent  enterprises  were  now 
combined  in  a  new  and  still  more  effective  way. 

(6)  The  sixth  form  may  be  called  the  holding  corporation. 
The  original   members  of  the  combination  are  first  organized 
as  corporations,  each  maintaining    its  separate  existence.     A 
new  central  corporation  is  then  formed  to  buy  up  or  hold  the 
stock,  or  at  least  a  majority  interest,  of  the  individual  corpora- 
tions.    On  the  basis  of  the  income  received  from  the  constit- 
uent companies,  the  parent  corporation  issues  its  securities,  and 
while  each  plant  or  business  is  operated  as  a  separate  unit,  its 
capacity  is  virtually  controlled  by  the  directory  of  the  parent 
company.     It  is  the  trust  in  a  new  and  more   effective  form, 
preserving  the  unity  of  the  old,  but  adding  a  certain  flexibility 

1  The  industrial  trust  must  not  be  confused  with  the  trust  company, 
any  more  than  the  industrial  pool  with  the  stock  exchange  pool. 


34°  Enterprise.  [§  147 

and  responsibility.  In  its  original  form  something  like  the 
holding  corporation  is  found  in  isolated  instances  in  an  earlier 
period,  as  in  the  case  of  the  Pennsylvania  Company  in  1870, 
the  Bell  Telephone  Company  in  1880  and  the  Southern  Pacific 
Company  in  1884.  All  these,  however,  were  organized  under 
special  laws ;  the  general  legality  of  one  corporation  holding 
the  stock  of  another  was  first  made  possible  by  the  New 
Jersey  Corporation  Act  of  1889.  This  led  to  a  sudden  out- 
burst of  activity  in  the  formation  of  holding  companies.  Of 
this  character  are  the  United  States  Steel  Corporation  of  1901, 
the  American  Tobacco  Company  of  1904  and  most  of  the 
newer  combinations.  The  attempt  to  apply  the  same  method 
to  railways  in  the  case  of  the  Northern  Securities  Company 
failed  because  of  special  prohibitive  legislation  ;  but  even  here 
the  same  result  is  likely  to  be  brought  about  through  the  so- 
called  system  of  community  of  interests  whereby  the  identical 
directors  virtually  possess  a  controlling  voice  in  the  man- 
agement of  each  constituent  company.  This  system  of  com- 
munity of  interests,  as  it  is  already  found  in  some  of  our  great 
financial  institutions,  where  separate  companies  are  controlled 
by  the  same  individuals,  may  well  prove  to  be  the  next  step  in 
a  still  greater  combination  of  capitalist  production. 

147.   Growth  of  Combination. 

Combination  of  capital,  as  is  obvious  from  the  illustrations 
of  the  last  section,  has  made  itself  manifest  in  four  business 
groups:  (i)  the  railroads;  (2)  the  franchise  or  public  service 
enterprises,  including  the  telegraph,  the  telephone  and  the 
so-called  municipal  monopolies  like  water,  gas  and  electric 
light,  street  railway,  heating  and  conduit  companies;  (3) 
the  trust  companies  in  the  narrower  sense,  the  banks  and  the 
insurance  companies ;  (4)  the  industrial  combinations.  The 
first  three  groups  are  so  important  in  themselves  and  so  clearly 
marked  off  from  the  others  that  they  will  be  more  appropri- 
ately discussed  below.  We  shall  confine  our  attention  here 
to  the  industrial  combinations. 


§  147]  Growth  of  Combination.  341 

The  advantages  of  such  combinations  from  the  point  of 
view  of  the  producers  are  obvious.  Large  savings  are  possible 
in  advertising  and  in  travelling  agents.  The  avoidance  of  cross 
freights  by  locating  the  establishments  at  different  places  is 
often  of  importance,  especially  in  the  case  of  heavy  or  bulky 
articles.  The  benefits  of  division  of  labor  and  large-scale  pro- 
duction may  be  multiplied  by  concentrating  departments  and 
facilitating  standardization  by  devoting  each  factory  or  mill  to 
one  particular  product.  The  larger  the  concentration,  the  bet- 
ter are  likely  to  be  the  knowledge  and  control  of  credit  rela- 
tions, so  as  to  reduce  the  loss  from  bad  debts.  Again,  more 
ample  means  are  afforded  to  secure  capacity  of  the  highest  order 
in  the  management  of  the  enterprise.  Finally,  the  wider  view 
which  comes  from  an  interchange  of  ideas  and  a  comparison  of 
experimental  methods  in  the  separate  plants  is  frequently  of 
value.  The  president  of  the  American  Tobacco  Company  a  few 
years  ago  declared  this  to  be  the  chief  benefit  of  combination. 

The  immediate  causes  of  consolidation  are  various.  It  may, 
as  in  the  railways  or  the  sugar  trust,  be  clue  to  a  realization  of 
the  folly  of  "  cut-throat "  competition ;  it  may,  as  in  the  iron 
mines,  be  owing  to  the  lower  prices  which  render  necessary  the 
application  of  better  methods  to  insure  lower  cost ;  it  may  be 
the  result  of  a  long  period  of  depression  which  has  almost 
eliminated  profits.  But  at  bottom  combination  is  due  to  the 
economy  of  production  that  comes  from  concentrated  capital. 
The  immense  profits  often  secured  by  the  promoters  may 
indeed  be  responsible  for  premature  or  dishonest  consolida- 
tions, but  such  mere  speculative  projects  are  obviously  short- 
lived. Unless  there  are  some  real  advantages  in  the  combi- 
nation it  cannot  endure  ;  the  mere  fact  of  its  continued  and 
prosperous  existence  justifies  its  formation. 

The  concentration  of  production  is  so  general  and  world- 
wide a  tendency  that  the  attempt  to  trace  it  to  any  minor 
cause  is  useless.  Combinations  are  sometimes  ascribed  to  the 
tariff  or  to  discriminations  in  railway  charges.  That  these 
exert  some  influence  in  particular  cases  is  more  than  probable, 


342  Enterprise.  [§  147 

but  that  they  serve  in  themselves  to  explain  the  facts  of  com- 
bination is  unlikely.  Trusts  and  pools  abound  in  the  European 
countries  where  the  tariffs  are  low  or  even  non-existent. 
Freight  discriminations  are  found  in  America,  but  are  un- 
known in  Germany ;  yet  industrial  combinations  are  well-nigh 
as  common  there  as  here.  Whatever  may  be  the  contributing 
causes,  the  fundamental  reason  is  clearly  the  economy  of 
concentrated  production.  It  is  only  in  recent  years  that  in- 
dustrial capital  has  become  so  abundant  as  to  disclose  the  real 
advantages  of  concentration. 

According  to  the  census  of  1900  there  were  185  combi- 
nations, representing  2,040  plants  and  turning  out  products  to 
the  value  of  $1,667,350,  a  little  over  14  per  cent  of  the  total 
industrial  output  of  the  United  States.  But  since  1900  the 
movement  has  progressed  rapidly.  In  1900  there  were  16 
combinations  each  with  a  capital  of  over  $50,000,000  and 
with  an  aggregate  capital  of  $1,231,000,000.  In  1904,  as 
appears  from  the  table  opposite,  not  only  were  there  25  such 
combinations  with  an  aggregate  capital  three  times  as  great 
($3,617,000,000),  but  a  single  combination  now  has  a  larger 
capital  than  the  16  combinations,  and  about  one-half  as  large 
as  all  the  185  combinations  in  1900. 

The  United  States  Steel  Corporation  is  such  a  striking 
example  not  only  of  the  consolidation,  but  of  the  integration 
of  production,  that  the  following  figures  are  appended.  The 
assets  of  this  corporation  in  1902  were,  according  to  the 
testimony  of  its  president  in  a  recent  lawsuit,1  as  follows : 

Iron  and  Bessemer  ore  properties $700,000,000 

Plants,  mills,  machinery,  etc 300,000,000 

Coal  and  coke  fields       100,000,000 

Railroads,  ships,  etc 80,000,000 

Blast  furnaces 48,000,000 

Natural  gas  fields 20,000,000 

Limestone  properties 4,000,000 

Cash  and  cash  assets 148,281,000 

$1,400,281,000 
1  Hodge  et  al.  vs,  U.  S.  Steel  Corporation, 


Growth  of  Combination. 


343 


In  the  second  annual  report  of  Dec.  31,  1903,  the  assets  had 
grown  to  $1,583,845,299.  Contrasted  with  this  integration  of 
unlike  industries,  we  have  the  consolidation  of  like  industries 


Name.  x 

When 
•"ounded. 

No.  of 
Plants 
Acquired 
or  Con- 
trolled. 

Capitalization, 
Outstanding 
Stock  and 
Bonds. 

i.  United  States  Steel  Corporation  . 
2  American  Tobacco  Co  .... 

1901 
I  QO4. 

785 

I,37O,OOO,OOO 
2  CO,OOO,OOO 

3.  American  Smelting  &  Refining  Co. 
4.  Amalgamated  Copper  Co.     .     .     . 
5.  International  Mercantile  Marine  Co. 
6.  American  Sugar  Refining  Co.    .     . 
7.  United  States  Leather  Co.     .     .     . 
8.  International  Harvester  Co.  .     .     . 
o    Standard  Oil  Co 

I899 
I899 
1902 
1891 

1893 
1902 
i8qq 

121 
II 

6 
55 
25 
6 
400 

201,550,400 
I75,OOO,OOO 
170,786,000 
I45,OOO,OOO 
130,444,600 
I  2O,OOO,OOO 

q7.soo.ooo 

i8qq 

207 

84,000,000 

ii  American  Can  Co.  

IQOI 

12-1 

82,c;7q.ooo 

12  Pullman  Co  . 

1867 

2 

74,000,000 

j  ->  Corn  Products  Co.  

iqo2 

2O 

71,642,000 

14.  Crucible  Steel  Co.  of  America  .  . 
15.  American  Car  &  Foundry  Co.  .  . 
1  6.  United  States  Rubber  Co.  .  .  . 

1900 

1899 
1892 

JQO2 

H 
17 
13 

7 

60,250,000 
60,000,000 
58,591,500 
c6,77  S.ooo 

i8q8 

80 

56,524,000 

IQ  International  Paper  Co  •  .  . 

1898 

24 

c;2,qm,  soo 

20.  American  Locomotive  Co. 
21.  Distillers  Securities  Corporation   . 
22.  Trenton  Potteries  Trust    .... 

1901 
1902 
1903 
iqo2 

9 
93 

45 
6 

50,418,500 
50,366,000 
50,000,000 

CJO  OOO  OOO 

24.  Dupont  International  Powder  Co. 

1903 
i8q8 

40 

9 

50,000,000 
50  ooo  ooo 

shown  in  the  following  list.  The  ten  subsidiary  companies, 
(the  Carnegie,  the  Illinois,  and  the  Lorain  Steel  Companies, 
the  American  Steel  and  Wire  Company,  the  National  and 
the  Shelby  Steel  Tube  Companies,  the  American  Sheet  Steel, 


1  This  table  is  taken  from  Moody,  The  Truth  about  the  Trusts,  1904,  p. 
453,  but  brought  down  to  date. 


344  Enterprise.  [§  148 

the  American  Tin  Plate,  the  American  Bridge  and  the  Union 
Steel  Companies),  themselves  the  results  of  many  consoli- 
dations, represent  86  blast  furnaces,  31  Bessemer  and  open- 
hearth  steel  works,  57  blooming,  slabbing,  billet  and  sheet 
bar  mills,  20  rail  and  plate  mills,  251  puddling  furnaces,  39 
skelp  mills.  59  bar,  hoop  and  cotton  tie  mills,  n  structural 
shape  works,  24  rod  mills,  22  wire  mills,  447  sheet,  black 
plate  and  tin  plate  mills,  5  tube  mills,  26  bridge  and  structural 
plants,  24  foundries  and  16  miscellaneous  works. 

148.   Effects  of  Combination. 

The  effects  of  combination  may  be  regarded  from  the  five- 
fold standpoint  of  the  owner,  the  wage-earner,  the  independent 
producer,  the  purveyor  of  the  raw  material  and  the  consumer. 

(1)  The  owner  in  modern  times  is  the  corporate  investor. 
So    far  as   the    problem  is  one   of  general  corporate    profits 
depending  on  the   ordinary  mutations  of  business,  it  will  be 
discussed  in  the  next  book.     So  far  as  the  profits  are  affected 
by  the   capitalization  of  the  enterprise,  it  has  already  been 
touched  upon.     The  surest  protection  of  the  innocent  investor 
is  to  be  sought,  as  we  have  seen,  through  the  avenue  of  pub- 
licity and  responsibility. 

(2)  The  influence  of  industrial  combination  upon  the  wage- 
earner  is  to  accentuate  the  general  effect  of  capital  upon  wages, 
to  be  studied  hereafter.    So  far  as  the  prosperity  of  the  laborers 
is  bound  up  with  the  general  productivity  of  the  enterprise,  the 
industrial  combination  which  tends  toward  greater  stability  and 
enlarged  productivity  may  work  toward   an  improvement  in 
their  condition.     To  this  may  be  opposed  the   consideration 
that  the  mere  fact  of  concentration  may  enable  the  enterprise 
to  present  a  more  solid  and  effectual   front  to  the  demands  of 
the  trades-unions.    On  the  other  hand,  the   dangers  of  a  strike 
are  multiplied  when  it  extends  through  all  the  ramifications  of 
a  vast  trust.     Finally,  the  far-sighted  heads  of  a  great  combi- 
nation are  apt  to  take  a  broader  view  of  the  labor  problem, 
and  to  seek  industrial  peace  by  wise  concessions  and  a  policy 


§  148]  Effects  of  Combination.  345 

of  making  the  worker  realize  that  his  interests  are  in  a  large 
sense  bound  up  with  those  of  the  combination.  The  American 
Federation  of  Labor  has  declared  unequivocally  that  as  a  body 
of  workmen  it  has  no  objection  to  the  trusts.  Yet  when  the 
combination  becomes  a  monopoly,  there  is,  as  we  shall  see, 
a  real  and  insidious  lurking  danger  in  its  ultimate  effects  upon 
wages. 

(3)  The  independent  producer  is  undoubtedly  assailed  by 
the  combination.  We  must,  however,  distinguish  between  the 
legitimate  and  illegitimate,  the  natural  and  unnatural  effects  of 
combination.  Where  the  combination  wins  its  way  by  better 
service  to  the  public,  the  disappearance  of  the  inefficient  small 
competitor  may  be  as  advantageous  to  the  community  as  was 
the  substitution  of  the  factory  for  the  sweat-shop  or  the  railway 
for  the  coach.  Even  for  the  individual  himself,  as  long  as  he 
is  not  pre-eminently  capable,  it  may  often  be  better  to  be  an 
official  of  a  huge  enterprise  on  a  fairly  secure  salary  and  with 
prospect  of  advance  than  an  independent  producer  continually 
on  the  fringe  of  defeat,  in  much  the  same  way  as  the  "  in- 
dependent "  hand-loom  weavers  in  England  and  America  were 
glad  to  join  the  ranks  of  the  factory  operatives.  To  rid  the 
community  of  the  inefficient  producer  and  to  convert  him  into 
a  useful  agent  may  be  the  beneficial  result  of  combination. 

This,  however,  presupposes  that  the  way  is  kept  open  for 
the  efficient.  In  other  words,  combination  ought  not  to  be 
permitted  to  assume  the  form  of  monopoly,  except  in  those 
quasi-public  enterprises  where  competition  is  itself  undesirable. 
The  "  unfair  "  means  through  which  it  is  attempted  to  shut 
off  rivalry  are  factor's  agreements,  so-called  predatory  compe- 
tition and  freight  discrimination.  The  factor's  agreements  are 
arrangements  whereby  retailers  are  induced  through  various 
favors  not  to  handle  competitive  goods.  Predatory  competi- 
tion is  the  temporary  cut  in  prices  only  at  those  points  and  at 
those  periods  when  competition  is  threatened.  Both  these 
practices,  however,  are  a  part  of  ordinary  competitive  business 
usage.  In  competition,  indeed,  the  benefit  of  the  lower  price 


346  Enterprise.  [§  148 

ultimately  inures  to  the  consumer ;  in  monopoly  it  accrues  to 
the  producer.  Yet  since  the  practices  themselves  are  irrespec- 
tive of  the  nature  of  the  business,  it  is  questionable  whether  any 
effective  means  of  checking  them  can  be  devised  or  would 
be  tolerated.  On  the  other  hand,  the  secret  rebates  granted 
by  the  railroads  are  undoubtedly  as  remediable  as  they  are  un- 
justifiable. Combination  turns  into  monopoly  largely  through 
railway  discrimination.  How  far  monopoly  actually  ensues 
will  be  discussed  below. 

(4)  So  far  as  the  purveyor  of  raw  material  is  concerned, 
much  is  supposed  to  depend  upon  the  percentage  of  the 
output  taken  by  the  combination.  Where  the  business  is  only 
one  degree  removed  from  the  raw  material  of  nature,  and 
especially  where  the  supply  of  this  material  is  restricted,  the 
tendency  to  concentrate  the  ownership  of  the  raw  material 
becomes  very  strong.  It  is  significant  that  most  of  the  largest 
combinations  on  the  list  in  page  343  have  grown  out  of  an 
ownership  of  raw  material  which  is  not  annually  reproducible, 
like  iron  ore,  copper  and  lead.  In  several  cases,  however, 
like  oil,  tobacco,  sugar  and  beef,  the  combination  does  not 
own  the  raw  material,  because  it  is  the  result  of  annual  pro- 
duction at  once  too  minute  and  too  widespread  for  concen- 
tration. In  these  and  similar  cases  the  complaint  is  often 
heard  that  the  trust  keeps  down  the  price  of  the  raw  material 
by  reducing  its  offer  to  the  lowest  limit.  While  there  un- 
doubtedly is  some  foundation  for  this  charge,  as  especially  in 
the  recent  history  of  the  Beef  Trust  and  of  the  Standard  Oil 
Trust  in  Kansas,  it  is  probable  that  the  statements  are  fre- 
quently exaggerated.  For  in  some  cases,  as  in  tobacco  and 
sugar,  the  market  is  an  international  one,  and  even  if  the 
combination  forms  so  large  a  part  of  the  international  demand 
as  to  control  the  price,  the  restriction  of  the  offer  below  the 
cost  of  the  marginal  producer  would  have  the  effect  of  reducing 
the  supply  and  thus  ultimately  leading  to  an  increased  price. 
As  long  as  the  total  demand  for  the  raw  material  suffers  no 
appreciable  change,  it  is  questionable  whether  the  concentra- 


§  149]  Limits  of  Combination.  347 

tion  of  demand  into  a  few  hands  is  apt  to  have  a  permanent 
effect  on  the  producer  of  the  raw  material.  Nevertheless  the 
temporary  consequences  may  be  burdensome  and  injurious. 

(5)  Finally,  the  influence  of  the  combination  upon  the 
consumer  shows  itself  chiefly  in  the  selling  price.  The  advan- 
tage of  combination  is  lower  cost,  but  the  object  of  combination 
is  higher  profits.  It  does  not  necessarily  follow  that  higher 
profits  mean,  as  is  usually  supposed,  actually  higher  prices. 
If  the  demand  can  be  stimulated  by  a  reduction  of  price, 
higher  profits  are  compatible  with  greater  sales  at  lower  prices. 
There  is  in  every  industry,  competitive  or  monopolistic,  an 
obvious  limit  to  high  price,  caused  by  the  possible  substitution 
of  some  lower-priced  equivalent.  This  commodity  competition 
is  omnipresent.  The  real  problem,  however,  is  whether  in 
those  combinations  which  produce  so  large  a  share  of  the 
output  as  effectually  to  control  the  market,  the  "  trust "  price 
is  higher  than  would  be  the  competitive  price.  A  careful 
investigation  into  some  of  the  leading  combinations  by  the 
Industrial  Commission  disclosed  the  fact  that  during  selected 
periods  when  the  combinations  were  actually  in  control,  the 
"  differential  "  or  margin  between  the  price  of  the  raw  material 
and  of  the  finished  product  had  risen,  even  though  the  actual 
selling  price  might  have  declined.  The  problem  thus  resolves 
itself  into  the  question  :  does  the  combination  tend  to  become 
a  monopoly? 

149.   Limits  of  Combination. 

It  is  clear  that  if  there  were  no  limit  to  combination,  the 
logical  result  in  every  industry  would  be  a  monopoly  of  pro- 
duction. As  a  matter  of  fact,  however,  there  are  two  classes 
of  limits,  natural  and  artificial. 

( i )  The  natural  limit  of  combination  is  the  persistence  of 
competition.  In  certain  branches  this  limit  does  not  exist, 
and  ought  not  to  exist.  In  the  railroad  business  the  objec- 
tion to  competition  is  that  it  leads  to  discrimination.  In  the 
other  public-service  corporations  competition  might  do  more 


Enterprise.  [§  149 

harm  than  good.  Competing  telephones  would  be  a  source  of 
lasting  confusion  to  the  patrons,  competing  gas  and  water  com- 
panies a  continual  annoyance  to  the  users  of  the  streets.  In 
some  other  branches  of  industry  monopolistic  combination  is 
undesirable  but  none  the  less  probable.  As  we  have  just  seen, 
where  the  industry  is  concerned  with,  or  based  upon,  masses 
of  raw  material  found  in  a  state  of  nature  but  in  limited  quan- 
tities and  in  specially  favored  locations,  the  control  of  the 
natural  monopoly  is  apt  to  lead  to  a  monopolistic  combination 
of  the  business.  In  ordinary  business,  however,  where  the  raw 
material  is  itself  either  a  manufactured  product  or  procurable 
under  competitive  conditions,  the  natural  limits  to  combina- 
tion are  more  obvious.  In  the  absence  of  legal  or  natural 
monopoly,  whenever  profits  are  high  enough  to  tempt  compe- 
tition, new-comers  are  likely  to  appear.  The  combination  may 
swallow  up  the  new  competitor,  but  as  long  as  science  remains 
free,  and  the  combination  does  not  control  the  government  or 
the  general  media  of  transportation,  the  process  will  repeat 
itself.  The  so-called  "  economic  wastes  "  of  competition  are 
a  cheap  price  to  pay  for  its  many  advantages.  Thus,  while  the 
United  States  Steel  Corporation  is  constantly  expanding,  new 
competing  corporations  have  been  growing  equally  fast  or  even 
faster.  Instead  of  a  single  combination,  we  have  in  each 
branch  the  looser  concentration  known  as  the  pool,  which  has 
to  be  readjusted  whenever  a  new  competitor  appears.  At  the 
close  of  1904,  after  the  Lackawanna  Steel  Corporation  decided 
to  make  steel  rails,  the  percentages  of  the  Steel  Rail  Associa- 
tion were  at  once  changed,  and  the  arbitrator  apportioned  the 
output  among  the  five  members, — the  United  States,  the 
Lackawanna,  the  Pennsylvania,  the  Cambria  and  the  Maryland 
Steel  companies.  So  in  another  domain  of  business,  like  the 
great  department  stores  in  our  cities,  there  is  no  way  of  keep- 
ing out  not  only  the  large  competitors,  but  the  small  competi- 
tors as  well.  Indeed  the  erection  of  these  mammoth  stores 
has  not  appreciably  diminished  the  number  of  little  shops. 
Again,  there  are  whole  fields  of  industry  where  combination 


[§  M9  Limits  of  Combination.  349 

is  only  slightly  applicable.  In  the  woollen  trades,  in  the  shoe 
factories,  in  the  cotton  and  silk  mills,  as  well  as  in  numberless 
other  industries,  the  combinations  are  apt  to  be  short-lived  or 
partial.  Finally,  in  the  immense  domain  of  agricultural  pro- 
duction the  possibility  of  combination  is  almost  entirely 
eliminated. 

(2)  The  artificial  limit  of  combination  takes  the  shape  of 
legislative  restrictions.  When  this  is  not  in  harmony  with  the 
natural  limit,  its  efficacy  is  small.  It  can  at  best  only  change 
the  form  of  the  combination.  Thus  the  anti-pooling  provision 
of  the  Interstate  Commerce  Law  of  1887,  and  the  Sherman 
Act  of  1890,  have  been  alike  powerless  to  prevent  the  continu- 
ance in  their  essential  features  of  the  railroad  pools  and  asso- 
ciations. The  numberless  Anti-Trust  state  laws  have  resulted 
in  a  change  of  form,  not  in  a  cessation  of  consolidation.  We 
are  only  slowly  awakening  to  the  fact  that  what  is  needed  is 
regulation  rather  than  prohibition.  In  Europe  the  govern- 
ments have  long  since  recognized  the  futility  of  rigid  prohibi- 
tions, and  are  now  concerned  chiefly  with  attempts  at  moderate 
control. 

Most  of  the  methods  usually  proposed  to  curtail  combina- 
tions are  ineffectual.  The  power  of  taxation  may  be  invoked, 
but  the  higher  tax  on  the  great  combinations  can  be  evaded  by 
reconstitution  into  apparently  loosely  united  and  legally  sep- 
arate units.  The  limitation  of  profits  has  been  tried,  but  with 
equal  lack  of  success,  owing  to  the  facility  with  which  profits 
may  be  apportioned  in  other  ways  than  dividends  and  in 
other  channels  than  the  shares  of  the  parent  company.  The 
prohibition  of  demanding  various  prices  at  different  places  is 
practically  inoperative.  The  limitation  of  charges  has  hitherto 
been  feasible  chiefly  in  such  public-service  corporations  where 
the  conditions  of  cost  remain  fairly  constant.  The  reduction 
of  the  tariff,  while  doubtless  desirable  in  particular  instances 
like  the  tin  plate  industry,  where  monopolies  have  been  shel- 
tered under  the  tariff  wall,  is  open  to  the  objection  that  unless 
most  carefully  carried  out  it  is  liable  to  destroy  the  industry 


350  Enterprise.  [§  149 

as  well  as  the  combination,  or,  at  all  events,  to  injure  the  small 
producer  equally  with  the  large  one.  The  assumption  of  the 
enterprise  by  the  government  is  a  last  resort,  far  beyond  the 
province  of  probable  American  policy. 

It  appears,  then,  that  the  methods  of  regulation  most  prom- 
ising of  success  are  the  maintenance  of  equality  in  transporta- 
tion and  the  securing  of  a  reasonable  publicity  in  the  formation 
and  conduct  of  the  enterprise*.  These  objects,  as  well  as  the 
removal  of  factitious  advantages,  once  accomplished,  the  natu- 
ural  limits  of  combination  will  disclose  themselves ;  and  com- 
bination will  turn  into  monopoly  chiefly  in  those  industries 
where  monopoly  itself  is  desirable.  Evidently,  however,  in 
such  cases  the  monopoly  must  be  controlled,  or,  in  last  resort, 
managed  by  government  itself.  Where  the  natural  regulation 
of  competition  is  completely  shut  out,  it  must  be  supplanted 
by  the  artificial  regulation  of  government.  But  where  publicity 
and  equality  are  preserved,  the  community  may  expect,  in  the 
vast  mass  of  private  industry,  to  reap  the  benefits  of  combina- 
tion without  suffering  the  burdens  of  monopoly.  The  practical 
policy  of  the  future  must  rest  upon  a  detailed  analysis  of  the 
various  classes  of  industry,  —  where  combination  is  possible 
without  monopoly,  and  where,  on  the  other  hand,  monopoly 
itself  must  be  frankly  recognized  and  held  in  check. 


Book  III. 
Value  and   Distribution. 


XXIII. 
PROFITS. 

150.  References. 

J.  B.  Clark,  Distribution  (1899),  ch.  xiii;  N.  G.  Pierson,  Principles 
(1902),  part  i,  ch.  v;  F.  A.  Walker,  Political  Economy  (1888),  part  4,  ch. 
iv;  and  The  Wages  Question  (1876),  ch.  xiv ;  A.  T.  Hadley,  Economics 
(1896),  chs.  iv,  ix;  A.  Marshall,  Principles  (1898),  bk.  vi,  chs.  vi,  vii ; 
T.  N.  Carver,  Distribution  (1904),  ch.  vii;  F.  A.  Fetter,  Principles  (1904), 
ch.  xxxi;  J.  S.  Nicholson,  Principles  (1893-1901),  bk.  ii,  ch.  xiii,  and  bk. 
iv,  ch.  vi;  A.  W.  Flux,  Principles  (1904),  ch.  x;  T.  Veblen,  Theory  of 
Business  Enterprise  (1904),  chs.  vi,  x ;  H.  R.  Seager,  Introduction  (1904), 
chs.  x,  xi;  H.  C.  Emery,  Speculation  in  the  Stock  and  Produce  Exchange 
of  the  United  States  (1896),  Place  of  the  Speculator  in  the  Theory  of  Dis- 
tribution (Am.  Econ.  Assoc.  Publications,  3d  series,  I,  No.  i,  1900), 
Legislation  against  Futures  (Pol.  Sci.  Quart.,  X,  1895),  and  The  German 
Exchange  Act  (Pol.  Sci.  Quart.,  X,  1895,  and  XIII,  1898) ;  A.  C.  Stevens, 
Futures  in  the  Wheat  Market  (Quart.  Jour.  Econ.,  II,  1888),  and  The 
Utility  of  Speculation  (Pol.  Sci.  Quart.,  VII,  1892)  ;  H.  Stokes,  Business 
in  Futures  (Econ.  Rev.,  VIII,  1898);  S.  J.  Chapman  and  D.  Knoop, 
Anticipations  in  the  Cotton  Market  (Econ.  Jour.,  XIV,  1904)  ;  R.  Giffen, 
Stock  Exchange  Securities  (1877) ;  A.  Crump,  Theory  of  Stock  Exchange 
Speculation  (2d  ed.,  1874). 

151.  The  Shares  in  Distribution. 

All  wealth  that  is  created  in  society  finds  its  way  to  the 
final  disposition  of  the  individual  through  certain  channels  or 
sources  of  income.  This  process  is  called  distribution,  and 

351 


352  Profits.  [§151 

the  shares  in  distribution  differ  not  only  in  amount  but  in 
kind. 

Distribution,  like  production,  is  a  social  phenomenon.  If 
every  one  consumed  what  he  individually  produced,  there  would 
be  no  exchange,  no  price,  no  distribution.  In  production  we 
study  the  creation  of  the  social  income ;  in  distribution  we 
study  its  division.  In  the  one  case  we  regard  it  as  the  na- 
tional output,  in  the  other  as  the  national  dividend.  In  produc- 
tion we  deal  with  the  cost  or  expense  of  the  factors  which 
co-operate  to  create  wealth ;  in  distribution  we  deal  with  their 
remuneration.  It  is  clear  that  the  shares  in  distribution  differ 
according  to  the  character  of  production  and  the  structure  of 
economic  life.  Where,  for  instance,  slavery  exists,  we  cannot 
speak  of  wages ;  where  the  same  individuals  own  the  capital 
and  do  the  manual  work,  we  cannot  well  distinguish  between 
profits  and  wages ;  where  capital  is  not  loaned,  interest  does 
not  emerge.  The  modern  science  of  economics  is,  as  we  have 
learned,  due  to  the  efforts  to  analyze  the  modern  shares  in 
distribution. 

The  study  of  distribution  is  primarily  a  study  of  the  remu- 
neration of  the  factors  of  production.  Since  each  factor  con- 
tributes to  the  common  result  known  as  the  social  income, 
there  must  be  a  certain  part  of  the  product  traceable  to  each 
factor.  There  are  hence  as  many  shares  in  distribution  as 
there  are  factors  in  production.  The  remuneration  of  labor  is 
called  wages.  The  remuneration  of  the  fund  of  capital  is 
called  interest.  The  remuneration  of  the  concrete  things 
that  possess  a  capital  value  is  called  rent.  Sometimes  rent  is 
limited  to  the  return  from  land ;  but  since  other  things  as  well 
as  land  are  rented,  it  is  better,  as  we  shall  see,  to  call  the  re- 
muneration of  land  land-rent  or  ground-rent  in  contradis- 
tinction to  other  rents.  Finally,  the  remuneration  of  the 
entrepreneur,  or  the  man  who  carries  on  the  enterprise,  is 
called  profits.  Among  them,  wages,  interest  or  rent,  and 
profits  exhaust  the  entire  social  income. 

In  modern  society  differentiation  of  function  has  proceeded 


§  152]  Ordinary  Profits.  353 

to  the  extent  that  different  classes  control  different  agents  of 
production.  This  separation,  however,  is  not  rigid.  The  same 
man  may  own  land  and  factories  ;  he  may  be  a  workman  and  a 
stockholder  in  the  same  plant,  as  in  the  United  States  Steel 
Corporation;  he  may  be  a  farm-laborer  and  a  tenant  or  a 
land-owner ;  he  may  be  a  money-lender  and  yet  be  actively 
engaged  in  industry,  commerce  or  agriculture.  In  the  great 
mass  of  cases,  however,  the  social  class  corresponds  to  a  dis- 
tinct kind  of  income,  and  in  its  broadest  aspect  the  social 
shares  in  distribution  correspond  to  the  factors  of  production. 

152.    Ordinary  Profits. 

Profits  are  the  income  from  business  enterprise.  They  are 
not  necessarily  limited  to  capital.  An  employment  agency  or 
an  Italian  padrone  may  make  profits  from  directing  labor  into 
the  right  channel.  A  real-estate  operator  may  make  profits 
out  of  selling  land.  Profits  are  a  result  of  business  enterprise, 
and  the  entrepreneur  may  deal  in  labor,  in  land,  in  capital  or 
in  all  three.  It  is  hence  inexact  to  speak  only  of  the  profits 
of  capital. 

The  best  method  of  gaining  an  insight  into  the  nature  of 
profits  is  to  consider,  first,  ordinary  profits.  By  ordinary  profits 
are  meant  the  profits  of  a  regular  business  that  deals  in  a  repe- 
tition of  analogous  transactions  in  competition  with  others. 
The  term  normal  profits  that  is  sometimes  employed  is  less 
satisfactory,  because  it  incorrectly  implies  that  there  is  such 
a  thing  as  a  normal  or  general  rate  of  profits,  as  well  as  because 
it  brings  to  mind  the  conception  of  normal  value ;  whereas 
profits  are  a  result  of  fluctuations  in  market  value  and  would 
not  exist  in  a  state  of  normal  equilibrium. 

Profits  are  always  a  surplus.  They  are  the  difference  between 
the  cost  of  production  or  acquisition  and  the  selling  price. 
They  form  a  differential,  however,  in  a  second  sense.  Profits 
are  the  surplus  of  the  intramarginal  over  the  marginal  pro- 
ducer. At  any  given  time,  under  competitive  conditions, 
market  price  is  the  same  (p.  234),  but  cost  varies.  The  ex- 

23 


354  Profits.  [§  152 

penses  of  production  are  manifold,  but  may  in  the  most 
developed  businesses  be  classified  into  wages,  rent,  interest 
on  the  capital  borrowed  or  invested,  taxes  and  miscella- 
neous outlays  like  insurance,  advertisements  and  transporta- 
tion expenses.  All  of  these  obviously  vary  from  individual  to 
individual.  Some  will  display  more  care  in'  the  selection  and 
arrangement  of  their  labor  force;  some  will  choose  a  more 
advantageous  situation,  with  a  saving  in  both  rent  and  trans- 
portation ;  some  will  accomplish  better  results  with  less  capital 
and  economize  in  interest  as  well  as  taxes ;  some  will  exercise 
more  ingenuity  in  advertising  or  securing  a  market.  At  the 
bottom  of  the  scale  is  the  marginal  producer,  working  under 
the  least  favorable  circumstances,  and  who  can  nevertheless  get 
no  more  for  his  goods.  With  him  price  equals  cost ;  with  the 
others  price  exceeds  cost.  The  excess  of  price  over  cost 
constitutes  profits. 

It  is  evident  that  in  the  long  run  profits  could  not  exist  in  a 
state  of  normal  equilibrium.  If  there  were  no  change  in  the 
general  conditions  affecting  value  —  if,  in  other  words,  economic 
forces  were  in  equilibrium  and  society  quiescent  in  all  respects 
save  the  existence  of  such  a  complete  mobility  of  capital  and 
labor  as  is  implied  in  the  idea  of  frictionless  competition,  — 
there  could  be  no  permanent  profit  to  any  producer.  The 
gross  earnings  or  gross  profits  would  indeed  include  interest  on 
capital  invested ;  for  if  the  business  man  did  not  earn  interest 
on  his  capital,  he  would  go  out  of  business  and  loan  his  capital 
at  the  normal  rate  to  some  one  else.  So  also  the  gross  earnings 
would  suffice  to  give  him  a  bare  compensation  for  his  services, 
for  otherwise  he  would  enter  some  other  employment  as  a 
wage-earner.  Gross  profits  must  include  interest  and  wages. 
But  there  would  be  no  net  profits,  or  surplus  profits,  or  profits 
in  the  real  sense  of  the  word.  For  as  soon  as  a  profit  appeared 
the  entrepreneurs  in  other  fields  who  were  just  making  ex- 
penses would  at  once  bid  against  each  other  in  their  effort  to 
secure  capital  and  labor,  until  they  would  capture  their  share 
of  the  market,  and  the  profits  would  dissipate  themselves  on 


§  152]  Ordinary  Profits.  355 

the  one  hand  in  the  higher  rate  paid  for  the  factors  of  pro- 
duction, and  on  the  other  hand  in  the  lower  price  of  the 
product  due  to  the  greater  supply.  What  was  added  in  one 
industry  would  be  subtracted  from  another.  In  actual  life, 
however,  there  is  a  continual  change,  —  population  varies, 
wants  are  modified,  capital  increases,  the  processes  of  industry 
and  methods  of  enterprise  alter.  Competitive  profits  are  due 
wholly  to  such  changes.  He  who  can  take  advantage  of  the 
market  secures  the  gain. 

Profits,  again,  are  necessarily  unstable.  They  last  only  as 
long  as  the  economic  fluctuation  or  variation  from  the  normal 
condition  continues.  A  new  invention  is  the  source  of  profit 
because  it  reduces  cost ;  but  when  the  patent  expires  and 
competition  sets  in,  the  influx  of  new  producers  will  reduce 
the  price  to  the  new  cost  level  and  the  profit  will  'disappear. 
The  profits  may  accrue  for  a  time  to  individual  producers  or 
to  the  whole  class  of  producers.  When  general  demand  aug- 
ments or,  as  in  common  parlance,  when  times  are  good  and 
sales  brisk,  every  one  may  make  money.  The  increased 
profits,  however,  will  lead  to  greater  production,  and  the  rela- 
tion between  consumption  and  production  will  soon  change, 
so  as  to  usher  in  the  "bad  times"  and  a  disappearance  of 
profits.  This  rhythmic  succession  of  inflation  and  depression 
will  be  studied  later.  Here  it  is  desired  to  call  attention  to 
the  fact  that  profits  can  last  only  as  long  as  the  economic  dis- 
harmony or  perturbation  lasts,  that  is,  as  long  as  the  forces  are 
not  in  equilibrium.  If  the  manufacturer  continually  introduces 
new  inventions,  he  may  retain  his  superiority  over  his  compet- 
itors. If  the  demand  of  the  community  grows  by  leaps  and 
bounds,  it  may  keep  ahead  of  the  new  production  and  for  a 
long  period  afford  profits  to  all  producers.  This  may  be  true 
of  a  particular  commodity  or  of  a  whole  group  of  enterprises. 
At  one  period  in  the  United  States  the  shipping  trade  was 
particularly  remunerative,  at  another  the  railroad  industry,  and 
so  on.  In  a  new  section  the  supply  of  capital  and  labor  may 
be  so  scarce  that  all  business  is  lucrative  ;  and  the  increase  in 


356  Profits.  [§152 

population  may  cause  land  values  to  rise,  so  that  agricultural 
profits  will  be  large.  In  an  old  country  the  general  political 
and  commercial  relations  may  be  such  as  to  afford  a  growing 
foreign  market,  with  the  possibility  of  large  and  long-continued 
profits  to  the  domestic  producer.  In  every  case,  however,  as 
soon  as  the  original  force  has  spent  itself  and  competition  has 
set  in,  the  profit  tends  to  vanish. 

In  this  sense,  and  in  this  sense  only,  is  it  true  that  profits 
tend  either  to  an  equality  or  to  a  minimum.  The  older  writers 
confused  interest  with  profit.  Interest  is  the 'return  from  the 
fund  of  capital ;  profits  are  the  return  from  the  conduct  of 
business  enterprise,  irrespective  of  whether  the  enterprise  deals 
with  capital  or  labor  or  both.  Interest  is  a  part  of  cost ; 
profit  is  a  surplus  above  cost.  Interest,  as  we  shall  see,  has  a 
normal  rate ;  profits  may  have  an  average  rate  but  no  normal 
rate.  The  marginal  producer  earns  no  profits;  the  intra- 
marginal  producers  make  profits  which  vary  with  the  discrep- 
ancy of  their  cost  from  the  market  price.  If  in  any  businesses 
indeed  profits  are  particularly  high,  the  more  efficient  pro- 
ducers in  other  lines  will  transfer  their  capital  to  these  occupa- 
tions ;  but  in  these  occupations,  as  in  the  others,  the  competitive 
profits  will  range  from  zero  to  large  figures.  If  there  is  any 
equality,  it  is  an  equality  of  an  average  between  much  and 
nothing.  On  the  other  hand,  while  the  tendency  to  an  equal- 
ity is  true  of  average  profits  —  which  is  of  importance  only  as 
between  occupations  —  the  tendency  of  profits  to  a  minimum 
is  true  of  each  particular  occupation.  There  is  under  normal 
conditions  of  progress  a  tendency  in  the  rate  of  interest  to  fall, 
but,  as  we  shall  see,  never  to  vanish ;  there  is  under  competi- 
tive conditions  always  a  tendency  for  the  rate  of  profits  in 
each  individual  business  to  disappear. 

Thus  in  ordinary  enterprises  profit  is  the  great  lure  of 
energy,  and  competition  the  great  destroyer  of  profit.  Com- 
petitive profits,  the  union  of  both,  are  hence  the  symptom  of 
progress.  They  can  exist  only  by  being  continually  renewed ; 
they  are  not  a  tax  on  the  community,  but  a  draft  on  nature. 


§  153]  Aleatory  Profits.  357 

Profits  are  a  result  of  price,  not  a  cause  of  price.  Production 
at  a  lower  cost  creates  profits ;  competition  forces  price  down 
to  lower  cost  and  eliminates  profits.  Profits  can  be  main- 
tained only  by  the  creation  of  a  continually  newer  cost  level 
lower  than  the  new  price. 

153.  Aleatory  Profits. 

Profits  are  sometimes  described  as  the  wages  of  superin- 
tendence. There  are  indeed  certain  occupations  where  the 
income  partakes  of  the  nature  of  wages.  The  commissions  of 
a  broker,  like  the  fees  of  a  professional  man,  are  really  wages, 
even  though  they  are  popularly  called  profits.  Wages,  how- 
ever, differ  from  profits  in  that  wages  are  a  stipulated  income 
and  profits  a  residual  income.  There  is  a  normal  rate  of 
wages,  there  is  no  normal  rate  of  profits.  Wages  are  a  part  of 
cost,  profits  a  surplus  over  cost.  The  entrepreneur  may  think 
that  he  deserves  a  return  for  his  services,  but  whether  he 
secures  one  depends  on  his  competitors.  There  is  always  a 
certain  level  below  which  wages  cannot  fall,  because  no  work 
would  otherwise  be  done ;  but  the  very  continuance  of  com- 
petitive profits  depends  on  the  abler  producer  cutting  down 
cost  to  the  point  where  the  marginal  producer  earns  no  profits. 
The  reduction  of  some  wages  to  zero  implies  the  starvation  of 
the  laborer  and  the  crippling  of  the  productive  force  of  the 
community ;  the  reduction  of  some  profits  to  zero  means  the! 
elimination  of  the  inefficient  and  the  continuance  of  progress.  : 
Above  all,  profits  differ  from  wages  in  that  profits  are  the  direct 
result  of  price  fluctuations.  The  question  thus  arises  as  to  the 
dependence  of  profits  upon  chance. 

Aleatory  or  chance  profits  exist  in  varying  degree.  Some 
are  essentially  unique  or  sporadic.  If  I  find  a  pocket-book  on 
the  street  or  receive  a  bequest,  the  income  is  wholly  aleatory. 
The  law  of  chance  governing  such  isolated  occurrences  may 
be  of  interest  to  the  mathematician,  but  is  of  little  importance 
to  the  economist.  The  line  between  aleatory  and  ordinary 
profits  is,  however,  not  so  easy  to  draw.  In  the  first  place,  we 


358  Profits.  [§i53 

have  the  great  field  of  speculative  profits,  to  be  discussed  in  a 
moment.  Secondly,  there  is  an  element  of  luck  in  all  business. 
The  oscillations  of  demand  and  supply  are  frequently  influ- 
enced by  accident.  A  flood,  an  invention,  a  war,  a  new  whim 
in  fashion,  a  chance  occurrence  of  any  kind,  may  affect  the 
individual  or  the  group,  the  producer  or  the  consumer,  and  by 
influencing  either  cost  or  price  modify  business  profits.  In 
one  sense  all  price  fluctuations  are  accidental. 

A  distinction  is  sometimes  drawn  between  industrial  and 
pecuniary  profits.  By  industrial  profits  in  the  broad  sense  are 
meant  profits  derived  from  the  production  and  sale  of  repro- 
ducible goods,  such  as  compose  the  great  mass  of  the  annual 
output  of  wealth.  "  Industrial "  in  this  sense  would  include 
agricultural  and  commercial  profits.  Pecuniary  profits,  on  the 
other  hand,  comprise  the  results  of  such  transactions  as  have 
to  deal  only  secondarily  with  production  and  primarily  with 
sale,  not  from  producer  to  consumer,  but  from  one  owner  to 
another.  The  chief  example  of  such  pecuniary  profits  nowa- 
days is  the  dealing  in  vast  masses  of  vendible  capital,  irrespec- 
tive of  its  industrial  uses.  Many  of  the  large  fortunes  of 
recent  times  have  been  derived  from  such  sporadic  or  fortui- 
tous profits.  When  financiers  trade  in  railway  securities  or 
"  industrial "  stocks,  their  profits  on  each  isolated  transaction 
may  be  independent  of,  or  even  opposed  to,  the  best  manage- 
ment of  the  corporation  as  reflected  in  higher  quotations ;  for 
their  profits  may  come  from  buying  at  lower,  rather  than  sell- 
ing at  higher,  prices.  But  even  here,  with  all  the  abuses  of 
which  the  practices  are  susceptible,  the  permanence  of  pecu- 
niary profits  as  a  whole  is  ultimately  connected  with  industrial 
progress.  If  stocks  go  down,  the  profits  of  some  must  be 
counterbalanced  by  the  losses  of  others ;  but  if  stocks  go  up, 
every  one  may  participate  in  the  gain,  and  even  if  there  are 
some  losses  they  may  be  more  than  compensated  by  the  profits 
of  others.  Stocks,  however,  can  rise  permanently  only  if  the 
enterprise  earns  more,  that  is,  if  it  is  industrially  more  efficient. 
Thus,  while  pecuniary  profits  may  in  individual  cases  be  the 


§  154]  Speculative  Profits.  359 

result  of  a  change  in  ownership,  with  no  assignable  relation  to 
the  production  or  utilization  of  the  commodities  which  the 
securities  represent,  pecuniary  profits  as  a  whole  have,  in  last 
instance,  a  real  connection  with  the  industrial  profits  on  which 
they  finally  rest. 

Chance  or  luck,  therefore,  may  often  be  the  cause  of  sporadic 
profits,  but  cannot  explain  their  persistence  either  for  the  in- 
dividual or  for  society.  The  individual  who  attempts  to  secure 
pecuniary  profits  can  in  the  long  run  succeed  only  if  he  uses 
good  judgment,  foresight  and  practical  sagacity,  thus  elimi- 
nating more  and  more  the  influence  of  blind  chance.  The 
financier,  like  the  manufacturer  or  merchant,  is  really  a  servant 
of  society;  like  some  servants,  he  may  be  refractory,  unfaith- 
ful or  treacherous,  but  in  the  main  he  will  fare  best  when  he 
best  subserves  the  interests  of  society.  The  aleatory  element 
is  inseparable  from  profits,  since  profits  are  derived  from 
fluctuations  ;  but  the  ultimate  cause  of  persistent  profits  is  the 
ability  of  the  individual  to  take  advantage  of  the  fluctuation,  — 
and  in  the  long  run  this  ability  plays  into  the  hands  of  society 
at  large. 

154.     Speculative  Profits  —  Nature. 

By  speculation  is  meant  the  purchase  or  sale  of  anything  in 
the  hope  of  profit  from  an  anticipated  change  in  its  price.  It 
differs  from  ordinary  trade  only  in  degree,  for  all  profit,  as  we 
have  seen,  has  an  aleatory  element.  The  difference,  however, 
consists  in  the  fact  that  speculation  concentrates  and  intensi- 
fies the  forces  which  affect  demand  and  supply. 

Speculation  was  in  former  times  chiefly  place  speculation. 
The  practice  of  buying  in  one  market  and  selling  at  almost 
the  same  time  in  another  has  been  lessened  by  the  modern 
means  of  transportation  and  communication,  whereby  price 
fluctuations  between  places  have  been  minimized.  It  exists 
to-day  chiefly  in  the  form  of  "  arbitrage  "  of  stock  or  com- 
mission brokers,  and  its  success  depends  on  the  rapidity  with 
which  their  telegraphic  facilities  may  enable  them  to  anticipate 


360  Profits.  [§  154 

the  published  quotations  on  the  exchanges.  The  more  im- 
portant form  at  present  is  time  speculation  based  on  price 
fluctuations  after  the  lapse  of  an  interval  of  time. 

Speculation,  again,  may  be  sporadic  or  regular.  Sporadic 
speculation  is  almost  as  old  as  business  itself.  It  is  the  result 
either  of  a  popular  frenzy  or  of  a  deliberate  scheme  to  take 
advantage  of  a  temporary  occurrence.  An  example  of  the 
first  kind  is  the  tulip  mania  in  seventeenth-century  Holland, 
when  the  most  fabulous  profits  were  made  by  those  who  had 
anticipated  the  short-lived  demand  for  bulbs.  So  also  the 
occasional  speculative  "  booms  "  in  real  estate  at  present  are 
the  cause  of  enormous  profits,  followed  by  corresponding 
losses  when  the  bubble  is  pricked.  In  such  cases  speculation 
is  due  to  changes  in  demand,  which  it  is  almost  impossible  for 
individuals  to  foresee  or  to  control.  Supply,  on  the  other 
hand,  lends  itself  more  readily  to  manipulation,  and  deliberate 
attempts  are  not  infrequently  made  to  accomplish  this  end. 
From  the  efforts  of  Joseph  to  buy  up  the  corn  crop  in  Egypt, 
and  from  the  decision  of  the  Greek  philosopher  to  show  his 
practical  wisdom  by  purchasing  in  advance  of  the  vintage  all 
the  winepresses,  down  to  the  modern  pools  and  rings,  attempts 
to  corner  the  market  are  occasionally  found.  While  sometimes 
successful  in  minor  cases,  they  commonly  fail  when  on  a  large 
scale.  The  failure  is  due  (a)  to  the  immensity  of  the  capi- 
tal required,  (b)  to  the  difficulty  of  procuring  and  retaining 
trusty  confederates  whose  selfish  interests  may  often  be  best 
subserved  by  selling  when  their  principal  is  buying,  (t)  to 
the  fact  that  rising  prices  will  bring  to  the  market  all  the 
reserved  stock,  and  (d)  to  the  danger  of  the  substitution  by 
the  consumer  of  some  cheaper  commodity.  Thus,  while  the 
successful  corner  in  Harlem  stock  in  1863  laid  the  foundation 
of  the  Vanderbilt  fortunes,  the  three  most  picturesque  and 
gigantic  attempts  of  the  last  two  decades — the  Chicago  Leiter 
corner  in  wheat,  the  Paris  Secretan  corner  in  copper  and  the 
New  York  Sully  corner  in  cotton  —  have  all  been  failures, 
resulting  in  the  ruin  of  the  speculators. 


§  154]  Speculative  Profits.  361 

Both  classes  of  sporadic  speculation  are  in  the  end  socially 
disadvantageous,  because  the  speculative  price  is  driven  far 
above  or  below  the  true  value,  with  resulting  losses  in  the 
process  of  restoring  the  equilibrium.  The  inordinately  high 
cotton  prices,  due  to  the  speculative  attempts  of  1904,  well- 
nigh  produced  a  crisis  in  the  cotton  industry  in  England  and 
New  England,  and  while  the  Southern  planters  temporarily 
benefited,  the  high  profits  led  to  such  an  increased  acreage 
during  the  next  season  that  the  price  fell  below  the  cost  of 
production.  A  moderately  remunerative  price  would  have 
been  preferable  to  these  sudden  alternations  of  large  profits 
and  extreme  losses. 

It  would,  however,  be  a  mistake  to  assume  that  all  speculation 
is  of  this  character.  Speculation  could  never  have  become  a 
part  of  the  normal  business  life  of  modern  times  if  it  had  sim- 
ply these  defects  and  anti-social  characteristics.  The  modern 
stock  and  produce  exchanges  have  a  definite  economic  func- 
tion to  perform. 

Speculation  occurs  in  securities  or  commodities.  The  qual- 
ities which  render  a  commodity  peculiarly  fit  for  regular  specu- 
lative dealings  are  three  in  number :  (a)  it  must  be  a  staple, 
with  a  large  and  regular  production ;  (fr)  it  must  be  homo- 
geneous in  quality,  so  that  any  unit  will  be  as  acceptable  as 
another;  (c)  it  must  be  capable  of  ready  definition  and 
measurement.  Accordingly  we  find  exchanges  devoted  to 
cereals,  like  wheat,  rye,  barley,  corn  and  oats,  to  coffee  and 
sugar,  to  cotton  and  tobacco,  to  iron  and  tin.  In  the  case 
of  securities  all  those  qualities  are  obviously  present.  The 
chief  transactions  on  both  the  stock  and  produce  exchanges 
may  be  summarized  as  follows. 

If  prices  in  the  estimation  of  the  speculator  are  high  but 
tend  downward,  he  will  "  sell  short,"  that  is,  engage  to  deliver 
at  a  future  time  goods  not  yet  in  his  possession.  If,  when  the 
time  arrives,  he  can  purchase  at  the  anticipated  lower  price, 
the  difference  constitutes  his  profits.  Or  the  same  result  can 
be  reached  by  a  "covering"  contract,  so  called  because  he 


362  Profits.  [§  154 

covers  the  short  sale  by  making  a  purchase  at  a  somewhat 
lower  price  deliverable  at  the  same  time.  On  the  other  hand,  if 
prices  are  low  but  in  his  estimation  tend  upward,  he  will  "  buy 
long,"  that  is,  buy  more  than  he  would  care  to  deliver  at  present ; 
and  when  the  goods  are  finally  delivered  he  can  sell  at  a  profit. 
Or,  as  in  the  preceding  case,  he  can  at  once  make  a  "  realizing  " 
or  "  liquidating  "  sale  at  a  higher  price,  deliverable  at  the  same 
time.  Because  the  "shorts"  speculate  for  a  fall,  they  are 
called  bears  (who  pull  down)  ;  while  the  "  longs,"  who  specu- 
late for  a  rise,  are  called  bulls  (who  toss  up).  When  a  sub- 
stantial interval  of  time  elapses  between  the  two  parts  of  the 
transaction,  it  is  called  a  "  future."  Cotton  futures,  for  in- 
stance, are  dealt  in  months  before  the  transaction  is  closed. 
June  deliveries  may  be  sold  in  January.  Where  the  delivery 
is  to  take  place  at  once,  that  is,  on  the  spot  or  in  the  imme- 
diate future,  we  speak  of  "  spot "  cotton  or  wheat. 

On  the  stock  exchange  most  of  the  deliveries  take  place  on 
the  following  day,  although,  as  in  New  York,  the  option  of  deliv- 
ery is  sometimes  three,  sometimes  thirty  or  sixty  days.  Apart 
from  the  mere  gains  in  daily  speculation  through  "  scalping," 
the  profits  on  the  stock  exchange  are  realized  chiefly  through 
loans.  If  the  "short,"  for  instance,  is  not  ready  to  buy  in 
the  stocks  when  delivery  is  due,  he  arranges  to  borrow  them, 
expecting  to  liquidate  his  loan  by  a  future  purchase  at  lower 
prices.  Vice  versa,  the  "long"  purchaser  who  is  not  ready  to 
sell  arranges  with  a  broker  to  "  carry  "  the  stocks  for  him  until 
such  time  as  he  can  sell  at  a  profit.  The  broker  protects 
himself  against  any  possible  fall  in  price  by  requiring  the  cus- 
tomer to  put  up  a  margin  in  cash,  which  differs  with  the 
price  fluctuations.  In  the  produce  exchange  it  is  the  practice 
to  deposit  with  some  constituted  authority  the  margin  or  sum 
sufficient  to  secure  the  other  party  from  loss  in  case  of  failure 
to  fulfil  the  contract  for  future  delivery.  Such  transactions 
are  therefore  called  speculating  on  a  margin.  In  practice  it  is 
impossible  to  distinguish  between  margin  dealings  where  there 
is  no  delivery  and  those  where  actual  delivery  is  made  or 


§  155]  Speculative  Profits.  363 

contemplated,  since  the  difference  depends  on  the  shifting  in- 
tention of  the  speculator,  and  since  in  every  contract  actual 
delivery  of  the  stock  or  produce  can  legally  be  called  for. 
Finally,  speculation  takes  the  form  of  privileges.  A  "  put  "  is 
the  privilege  to  put  or  deliver  to  the  other  party  at  a  definite 
time  the  security  or  commodity  at  a  fixed  price.  A  "  call  "  is 
the  privilege  to  call  or  demand  from  the  other  party  at  a  defi- 
nite time  the  security  or  commodity  at  a  fixed  price.  Puts 
and  calls  may  be  bought  or  sold ;  when  a  speculator  acquires 
the  right  of  electing  whether  to  put  or  call  the  stock  the 
privilege  is  called  a  "spread  "  or  "straddle."  Prices  of  such 
privileges  depend  on  the  nature  of  the  market,  the  nature  of 
the  security,  the  length  of  time  the  privilege  has  to  run  and  the 
difference  of  the  stipulated  from  the  present  market  price. 

155.  Speculative  Profits — Function. 

The  chief  economic  function  of  regular  speculation  consists 
in  the  assumption  of  risk  and  results  in  the  equalization  of 
price. 

First,  as  to  the  assumption  of  risk.  When,  under  the  stress 
of  modern  capitalism,  dealings  in  commodities  became  national 
and  even  international,  the  perturbations  affecting  market  values 
grew  to  be  so  vast  and  so  numerous  that  ordinary  business  was 
seriously  compromised  by  the  violent  fluctuations  in  the  price 
of  the  raw  materials  of  industry.  The  manufacturer  who 
bought  his  materials  in  the  international  market  expected 
indeed  a  profit  on  the  production  of  the  finished  article,  but 
was  unwilling  to  have  this  profit  turned  into  loss  by  sudden 
changes  in  the  price  of  the  raw  material.  It  was  to  secure  an 
escape  from  the  risks  of  such  oscillations  that  a  special  class 
arose  which  assumed  this  risk  and  by  concentrated  attention 
derived  a  profit  from  the  price  fluctuations. 

The  first  way  in  which  risk  is  minimized  for  the  ordinary 
business  man  and  assumed  by  a  regular  speculative  class  is 
through  the  provision  of  a  continuous  open  market.  A  cotton- 
spinner,  for  instance,  accepts  an  order  for  goods  to  be  delivered 


364  Profits.  [§  155 

in  a  year,  and  expects  to  begin  spinning  in  six  months.  Unless 
he  is  able  to  .buy  now  the  cotton  to  be  delivered  then,  he  will 
be  at  the  mercy  of  the  chance  variations  in  the  cotton  market, 
and  although  he  may.  be  the  most  capable  of  business  men 
his  entire  profit  may  be  wiped  out  by  a  rise  in  the  price  of 
cotton.  The  cotton  future  enables  him  to  eliminate  this  risk. 
The  same  is  true  of  futures  in  wheat  or  other  commodities. 
It  applies  equally  to  the  stock  exchange.  If  a  railway  or 
other  industry,  in  launching  a  new  enterprise,  had  to  depend 
on  the  chance  investors  at  the  time  of  the  issue  of  the  securi- 
ties, it  would  be  seriously  hampered.  The  mere  knowledge 
that  at  any  moment  there  will  be  a  ready  sale  on  the  exchange 
greatly  increases  the  circle  of  purchasers,  many  of  whom  may 
not  intend  to  be  permanent  investors.  The  stock  exchange 
aids  the  investment  of  capital,  as  the  produce  exchange  aids 
the  production  of  finished  commodities.  Business  orders  and 
corporate  needs  are  intermittent,  because  they  depend  on 
temporary  exigencies ;  the  risks  at  one  end,  at  all  events,  are 
eliminated  by  the  unintermittent,  continuous  market  which 
regular  speculation  affords.  The  cotton  exchange  was  the 
result  of  the  disorganization  of  the  cotton  trade  after  the  civil 
war ;  speculation  in  all  the  other  staples  has  in  the  same  way 
been  the  consequence  of  the  efforts  of  the  manufacturer  to 
avert  the  risks  of  intermittent  and  spasmodic  fluctuations  in 
the  raw  material. 

A  natural  and  more  recent  outcome  of  this  attempt  to  avoid 
risk  is  the  practice  of  "hedging"  or  "covering"  transactions. 
An  English  miller,  for  instance,  needs  wheat  in  February  and 
buys  his  supply  in  California,  let  us  say,  at  a  price  of  90  cents 
a  bushel.  By  the  time  the  wheat  reaches  his  mill  and  the  flour 
has  been  finally  disposed  of,  it  may  be  September,  and  the  price 
of  wheat  may  have  fallen  to  75  cents,  with  a  corresponding  fall 
in  the  price  of  flour.  To  protect  himself  against  such  a  loss 
the  miller  sells  in  February  at  Chicago  for  September  delivery 
the  same  quantity  of  wheat  for  the  same  price  as  that  at  which 
he  bought,  90  cents.  When  September  arrives,  he  again  enters 


§  155]  Speculative  Profits.  365 

the  Chicago  market  and  makes  good  his  delivery  contract  by 
buying  the  wheat  at  the  market  price  of  75  cents.  His  profits 
in  this  deal  equal  his  losses  in  the  other,  and  by  this  process  of 
"hedging"  contracts  he  eliminates  all  risk  in  price  fluctuations 
due  to  the  raw  material.  He  is  content  to  derive  his  gains 
from  the  legitimate  profits  of  his  milling  business.  Through 
the  use  of  such  wheat  and  cotton  futures  we  thus  nave  the 
paradoxical  result  that  the  business  man  often  resorts  to  specu- 
lation in  order  to  free  his  business  from  speculative  influences.) 

The  result  of  regular  speculation,  again,  is  to  steady  prices. 
If  with  wheat  prices  at  80  cents  a  bushel  there  is  a  prospect 
of  a  large  crop,  the  intelligent  speculator  will  sell  short  (a 
future)  say  at  70  cents,  expecting  to  buy  in  at  65  cents.  All 
this  selling  on  the  part  of  the  bears,  however,  tends  to  reduce 
present  prices  and  thus  to  increase  consumption,  which  again 
tends  to  keep  the  future  price  from  falling  so  low  or  so  suddenly 
as  it  would  otherwise  have  done.  Vice  versa,  if  a  crop  short- 
age is  in  prospect,  prices  tend  to  rise,  the  commodity  becomes 
a  "good  buy"  and  the  bulls  are  active.  The  increased  pur- 
chases tend  to  raise  present  prices  and  to  check  consumption, 
while  the  owners  in  a  rising  market  hold  on  for  the  prospec- 
tive profit.  This  combination  of  a  somewhat  smaller  demand 
and  a  larger  supply  will  prevent  such  a  sharp  rise  in  prices  as 
would  ordinarily  follow  a  bad  crop.  Speculation  thus  tends  to 
equalize  demand  and  supply,  and  by  concentrating  in  the 
present  the  influences  of  the  future  it  intensifies  the  normal 
factors  and  minimizes  the  market  fluctuation.  Speculation 
hence  exerts  a  directive  influence  on  price.  A  good  example  of 
this  is  afforded  by  the  Gold  Law  during  the  civil  war.  The 
discount  in  greenbacks  was  mistakenly  ascribed  to  the  specu- 
lation on  the  gold  exchange,  and  a  law  was  enacted  to  prohibit 
all  such  transactions.  As  a  result,  the  premium  on  gold  jumped 
at  once  from  195  to  285,  with  wild  fluctuations  day  by  day,  to 
be  followed,  after  the  hasty  repeal  of  the  law  fifteen  days  later, 
by  just  as  sudden  a  recession  of  the  price. 

Speculation  is  hence  so  perplexing  a  phenomenon  because 


366  Profits.  [§  156 

of  its  Janus-like  aspect.  So  far  as  it  has  become  the  regular 
occupation  of  a  class,  differentiated  from  other  business  men 
for  this  particular  purpose,  it  subserves  a  useful  and  in  modern 
times  an  indispensable  function.-  The  expert  dealer  on  the 
exchanges,  who  studies  and  prejudges  the  market,  will  in  the 
long  run  secure  profits  by  reducing  risks  and  steadying  prices. 
In  this  \v  .der  sense  speculative  profits  are  earned  like  other 
profits.  On  the  other  hand,  numbers  of  individuals  without 
experience  or  ability  are  constantly  taking  "  flyers "  on  the 
exchanges,  and  gamble  in  securities  or  commodities  as  they 
would  in  cards.  Speculation  here  is  as  demoralizing  to  earnest 
effort  and  thrift  as  is  the  lottery.  Moreover,  even  the  profes- 
sional dealer  will  often  indulge  in  what  we  have  termed  spo- 
radic speculation,  and  by  an  extensive  manipulation  of  the 
market  bring  about  the  unsteadying  of  prices  usually  connected 
with  a  "squeeze"  or  a  "corner."  Difficult  as  it  is  to  draw 
the  line  in  practice,  the  distinction  between  economic  and 
uneconomic  speculation  is  faintly  recognized  in  the  ordinary 
attitude  toward  the  bucket-^hop  as  compared  to  the  stock 
exchange.  It  will  be  more  clearly  appreciated  in  the  future 
when  the  exchanges  themselves  exercise  a  more  rigid  scrutiny 
over  the  actions  of  their  members,  and  when  business  ethics 
will  be  lifted  to  a  higher  plane  of  social  responsibility.  At 
present  speculation  has  its  economic  abuses  as  well  as  its 
economic  function. 

156.  Monopoly  Profits. 

In  the  preceding  discussion  profits,  whether  ordinary,  alea- 
tory or  speculative,  have  been  assumed  to  be  subject  to 
competitive  influences.  The  free  play  of  competition,  how- 
ever, is  often  obstructed  by  natural  or  artificial  barriers.  When 
these  obstacles  are  only  partial,  we  speak  of  economic  friction ; 
when  they  are  complete,  we  are  in  the  presence  of  monopoly. 
In  the  case  of  friction,  the  fortunate  possessor  of  the  tempo- 
rary advantages  secures  an  extra  gain,  which,  as  we  know,  will 
ultimately  disappear.  In  the  case  of  monopoly  the  extra 


§  156]  Monopoly  Profits.  367 

gain  seems  to  be  permanent.  In  a  deeper  sense,  however, 
even  monopoly  profits  are  not  permanent.  This  is  due  to 
the  principle  of  capitalization,  discussed  above  (ch.  xiv).  As 
soon  as  the  monopoly  producer  disposes  of  his  business,  the 
profits  are  capitalized  into  the  higher  selling  price,  and  the 
new  purchaser  will  secure  only  the  interest  on  the  capital 
outlay.  While  monopolies  are  not  often  sold,  the  same  result 
is  reached  through  the  modem  corporate  form  of  business. 
For  here  the  securities,  which  entitle  each  holder  to  a  share  of 
the  monopoly  profits,  are  so  influenced  by  the  forces  of  the 
market  that  large  dividends  are  at  once  capitalized  into  higher 
market  prices,  with  the  result  that  the  net  returns  to  the  new 
purchaser  will  be  only  the  current  market  rate  of  interest. 
Thus,  under  modern  economic  conditions,  even  monopoly 
profits  tend  to  dissipate  themselves.  They  are  essentially 
transitory,  except  in  the  hands  of  the  original  owners.  With 
the  continual  shifting  of  ownership,  so  characteristic  of  mod- 
ern life,  the  original  possessors  soon  disappear.  Since,  how- 
ever, the  original  owners  at  any  given  time  are  an  appreciable 
body,  monopoly  profits  often  assume  a  great  importance. 

Monopoly  incomes,  like  competitive  incomes,  are  not  limited 
to  profits.  A  class  of  workmen  may  be  able  to  restrict  entrance 
to  their  trade  or  to  prevent  competition  with  it.  In  that  case 
they  would  secure  monopoly  wages.  Where  the  investments 
by  banks,  savings  institutions  or  trust  estates  are  confined  by  law 
to  a  specific  kind  of  bond,  there  is  virtually  an  element  of 
monopoly  in  the  price  of  that  security.  Where  a  particu- 
lar city  plot  is  wanted  for  specific  purposes,  the  element  of 
superiority  in  the  site  approaches  so  close  to  monopoly  that  we 
can  without  gross  error  speak  of  a  monopoly  rent.  Monopoly 
profits,  however,  like  all  profits,  are  a  result  of  price.  As  we 
have  already  discussed  the  differences  between  monopoly  price 
and  competitive  price,  we  may  pass  these  by  in  this  place  with 
the  mere  reminder  that  monopoly  profits  are  by  no  means 
without  bounds.  The  two  natural  limitations  on  monopoly 
price,  and  hence  on  monopoly  profits,  are  the  existence  of 


368 


Profits.  [§  157 


substitution  and  of  potential  competition.  In  the  first  place, 
as  we  have  learned  (p.  256),  even  where  the  monopolist  is 
securely  intrenched,  there  is  always  a  point  of  maximum  mo- 
nopoly revenue  depending  on  the  price  at  which  the  greatest 
sales  can  be  effected.  Any  increase  of  price  above  that  point 
will  lead  to  the  falling  off  of  sales  through  the  substitution  of 
some  analogous  commodity,  and  thus  to  a  decrease  of  profits. 
The  failure  of  the  Secre"tan  corner  in  copper  was  largely  due  to 
the  unexpected  use  of  substitutes,  caused  by  the  forcing  up  of 
the  price.  Secondly,  when,  as  in  many  cases,  the  monopolist 
is  subject  to  the  potential  competition  not  of  similar  com- 
modities but  of  other  possible  producers  of  the  same  commod- 
ity, his  tendency  to  raise  prices  will  be  limited  by  the  danger 
not  only  of  a  falling  off  in  the  general  demand,  but  of  the 
capture  of  a  part  of  this  existing  market  by  some  new-comer 
who  is  tempted  by  the  prospect  of  similar  profits.  Within 
these  limits,  however,  there  is  still  a  large  field  for  the  extra 
gains  known  as  monopoly  profits. 

157.    Regulation  and  Justification  of  Profits. 

The  demand  for  governmental  control  of  profits  comes  from 
three  sources,  —  those  who  object  to  ordinary  profits  because 
they  oppose  private  property ;  those  who  decry  aleatory  and 
especially  speculative  profits ;  and  thirdly,  those  who  desire  to 
eliminate  monopoly  profits.  Let  us  discuss  these  in  inverse 
order. 

( i )  Unrestricted  monopoly  profits,  are  of  course,  socially  un- 
desirable. Even  where  monopoly  is  not  in  itself  objectionable, 
as  in  special  fields  like  transportation  and  certain  municipal  en- 
terprises, some  substitute  for  the  automatic  regulative  action  of 
competition  must  be  secured.  Experience,  however,  has  re- 
peatedly shown  that  this  cannot  take  the  form  of  a  regulation 
of  profits.  The  most  recent  attempt,  as  that  of  Massachusetts 
with  the  gas  companies,  has,  like  all  its  predecessors,  been  frus- 
trated by  the  ease  with  which  profits  can  be  adroitly  diverted 
into  the  income  of  subsidiary  enterprises.  Efforts  to  regulate 


§  157]        Regulation  and  Justification.          369 

profits  always  result  in  profits  nominally  within  the  limit.  The 
only  two  effectual  ways  to  deflect  monopoly  profits  to  the  pub- 
lic are  either  to  regulate  prices,  which  will  prevent  the  profits, 
or  to  tax  the  enterprise,  which  will  reduce  the  profits.  The 
surest  method,  however,  of  eliminating  monopoly  profits  is 
to  eliminate  the  monopoly  by  keeping  open  the  door  of 
opportunity. 

(2)  Speculative  profits,  on  the  other  hand,  cannot  be  reached 
in  this  way.    Monopoly  can  be  distinguished  from  competition, 
but  regular  speculation  cannot  be  sharply  set  off  from  ordinary 
business.     The  recent  anti-option  laws  of  Germany  have  either 
been  ineffectual  or  have  done  harm  in  preventing  the  legiti- 
mate and  economic  benefits  of  speculation.     To  prohibit  spec- 
ulation is  to  prevent  the  good  as  well  as  the  evil.     Taxation, 
again,  is  applicable  only  to  certain  aleatory  profits.     The  effort 
to  tax  speculative  profits  encounters  the  well-nigh  insuperable 
difficulty  of  causing  the  tax  to  be  actually  borne  by  the  recip- 
ient of  the   profits.      Finally,  the  prohibition   of  speculative 
prices  is  virtually  equivalent  to  the  futile  prohibition  of  spec- 
ulation itself. 

(3)  The  opposition  to  ordinary  profits  emanates  from  those 
who  deprecate   the   entire   constitution   of  modern   industrial 
society.     According  to  Marx,  for  instance,  profits  are  a  defal- 
cation from  wages.     Since  all  value,  according  to  him,  is  the 
product  of  labor,  the  surplus  value  which  is  called  profits  is 
a  surplus  filched  from  wages.     The  socialist  theory  of  surplus 
value,  however,  is  defective  in  four  points :    (a)   It  identifies 
labor  with  manual  work  and  neglects  the  wages  of  superintend- 
ence ;  (ft)  it  ascribes  value  to  labor,  whereas  labor  is  not  the 
cause  of  value  ;  (c)  it  reduces  the  factors  of  production  to  one, 
whereas  in  actual  life  there  are  almost  always  more  than  one  ; 
(d)  above  all,  it  overlooks  the  fact  of  marginal  value.     Even 
if  we  roughly  state  that  prices  vary  according  to  cost  of  pro- 
duction, and   even  if  for  purposes  of  argument  we  concede 
that  cost  of  production  is  reducible  to  wages,  all  this  would 
apply  only  to  marginal  cost.    The  marginal  producer,  however, 

24 


370  Profits.  [§  157 

normally  earns  no  profits,  and  the  surplus  which  is  secured 
by  the  intramarginal  producer  may  .come  from  a  dozen  other 
sources  than  wages.  In  point  of  fact  it  is  most  unlikely  to 
come  from  wages,  since  wages  under  competitive  conditions 
are  apt  to  be  the  same  for  the  identical  work  in  all  the  enter- 
prises, whether  marginal  or  intramarginal.  Profits  are  indeed 
a  surplus,  but  they  are  not  a  surplus  of  the  kind  imagined  by 
the  socialists.  The  only  way  to  get  rid  of  profits  is,  as  the 
socialists  correctly  state,  to  abolish  private  property  in  the  fac- 
tors of  production.  The  abolition  of  private  property,  how- 
ever, would  be  the  abolition  of  progress. 

This,  of  course,  does  not  imply  that  all  existing  profits  are 
defensible.  Fraud  and  chicanery  still  stalk  abroad ;  illegitimate 
privileges  are  seized  or  extorted  \  unfair  advantage  is  taken  of 
weakness  or  ignorance  ;  public  franchises  are  dishonestly  ac- 
quired or  inadequately  compensated.  All  this  is  to  say  that 
many  individuals  are  still  on  a  low  plane,  and  that  the  level  of 
commercial  morality  is  not  so  high  as  it  ought  to  be  and  as 
it  some  day  will  be.  This,  however,  does  not  touch  the  legiti- 
macy of  profits  as  an  institution.  Profits  honestly  acquired  are 
in  the  main  an  inevitable  concomitant  of  private  property. 
With  monopolies  reduced  to  a  minimum,  with  speculation 
restored  to  its  true  economic  function  and  with  competition 
conducted  on  the  high  plane  of  honesty  and  fair  dealing, 
profits  will  be  purged  of  their  alloy  and  will  stand  forth  in 
their  true  light  as  the  legitimate  fruit  of  energy  and  foresight. 


CHAPTER  XXIV. 
RENT. 

158.  References. 

J.  B.  Clark,  Distribution  (1899),  chs.  xiii,  xxiii;  F.  A.  Fetter,  Princi- 
ples (1904),  ch.  x;  A.  S.  Johnson,  Rent  in  Modern  Economic  Theory,  chs. 
iii,  iv ;  A.  Marshall,  Principles  ( 1898),  bk.  v,  chs.  viii-x,  and  bk.  vi,  ch.  ix ; 
N.  G.  Pierson, Principles  (1902),  part  i,  ch.  ii;  W.  S.  Jevons,  Theory  (1888), 
ch.  vi ;  H.  Sidgwick,  Principles  (1883),  bk.  ii,  ch.  vii;  F.  v.  Wieser, 
Natural  Value  (1893),  bk.  iii,  part  2;  T.  N.  Carver,  Distribution  (1904), 
ch.  v;  A.  W.  Flux,  Principles  (1904),  ch.  vii;  H.  R.  Seager,  Introduction 
(1904),  ch.  xii;  The  Relation  between  Rent  and  Interest  (A  Discussion  in 
Am.  Econ.  Assoc.  Publications,  New  Series,  V,  1904) ;  M.  Pantaleoni, 
Pure  Economics  (1898),  part  3,  ch.  iv;  J.  S.  Nicholson,  Principles  (1893- 
1901),  bk.  ii,  ch.  xiv,  and  bk.  iv,  ch.  v;  W.  Smart,  Distribution  (1899), 
ch.  xxvi;  R.  M.  Kurd,  Principles  of  City  Land  Values  (1903);  T.  E. 
Cliffe  Leslie,  Land  Systems  and  Industrial  Economy  of  Ireland,  England 
and  Continental  Countries  (1870);  W.  H.  Dawson,  The  Unearned  Incre- 
ment (1890) ;  H.  George,  Progress  and  Poverty  (1879)  ;  E.  R.  A.  Seligman, 
Essays  in  Taxation  (1904),  ch.  iii ;  A.  H.  Stone,  A  Plantation  Experiment 
(Quart.  Jour.  Econ.,  XIX,  1905). 

159.    Nature  of  Rent. 

Rent,  as  we  have  learned,  is  the  product  of,  or  income  from, 
the  single  use  or  succession  of  limited  uses  of  a  thing,  and 
rental  value  is  to  be  contrasted  with  capital  value.  In  ordinary 
parlance,  however,  rent  signifies  the  money  payment  to  the 
owner  for  such  a  limited  use.  According  as  we  regard  it  from 
the  point  of  view  of  making  or  of  receiving  the  payment,  to 
rent  anything  is  to  dispose  of  or  to  pay  for  its  use.  When 
the  social  conditions  are  such  that  some  one  commodity  is 
commonly  rented  instead  of  sold,  its  income  in  general  is  apt 
to  be  called  rent.  This  was  true  of  land  during  the  middle 


372  Rent.  [§  159 

ages  in  Europe,  and  is  still  true  in  those  countries  where 
mediaeval  customs  survive  or  where  modern  conditions  have 
brought  about  a  relation  of  landlord  and  tenant.  Since  most 
of  the  land  is  rented,  rent  has  come  to  mean  the  income  from 
land,  whether  rented  or  not ;  and  since  the  chief  thing  that  is 
usually  rented  is  land,  rent  is  often  made  synonymous  with  the 
income  from  land  alone. 

It  is  obvious,  however,  that  this  is  doubly  confusing.  In  the 
first  place,  in  some  countries  land  is  more  commonly  sold  than 
rented.  This  is  the  case  with  agricultural  land  in  a  community 
of  peasant  proprietors  or  of  individual  farmers  ;  and  with  urban 
land  in  all  those  districts  where  the"  inhabitants,  rich  or  poor,  own 
their  homes.  When  land  is  sold  instead  of  rented,  the  pro- 
ceeds certainly  do  not  constitute  a  rent.  They  might  indeed 
be  called  a  capitalization  of  the  rent,  because  they  involve  a 
payment  for  all  future  uses.  Secondly,  other  things  are  often 
more  commonly  rented  than  is  land.  Apart  from  the  fact  that 
the  rental  of  real  estate  frequently  includes  the  rent  of  a  house, 
which  is  economically  distinct  from  the  land,  men  may  live  in 
their  own  houses  and  yet  rent  telephones  by  the  year,  carriages 
by  the  month,  plants  by  the  week,  and  awnings  or  table  fur- 
nishings by  the  day.  Land  rent  is  qualitatively  only  an  in- 
significant part  of  all  rent. 

Nevertheless,  land  is  quantitatively  so  important  as  compared 
with  any  other  single  commodity,  and  possesses  so  unique  a 
social  significance,  that  the  income  from  land  merits  a  separate 
study.  It  must  be  remembered,  however,  that  the  utility  of 
such  an  independent  discussion  emerges  only  when  we  regard 
society  from  the  point  of  view  of  change,  —  that  is,  when  we 
consider  rent  historically,  or  compare  the  growth  of  land  rent 
with  that  of  other  rents.  If  we  take  a  cross  section  of  society 
at  any  moment,  and  analyze  the  distribution  of  the  social 
income,  the  rent  of  land  is  to  be  explained  in  no  different  way 
from  that  of  other  things.  The  rent  of  land  is  its  economic 
product,  that  is,  the  contribution  of  land  over  and  above  that 
of  the  labor  and  the  capital  employed  on  the  land.  The  law 


§  160]     -  Land  Rent.  373 

which  at  any  given  moment  governs  the  relation  of  the  land  to- 
its  product  is  the  same  as  that  which  governs  the  relation  of 
any  economic  good  or  factor  of  production  to  its  product. 
Much  confusion  has  resulted  from  the  failure  to  observe  this 
warning. 

The  traditional  law  of  rent,  for  instance,  includes  three  state- 
ments :  rent  is  the  result  of  the  law  of  diminishing  returns ; 
rent  is  a  differential  or  surplus  over  marginal  or  no-rent 
land ;  rent  is  not  a  part  of  cost  of  production.  So  far  as 
these  statements  are  true,  however,  they  are  not  peculiar  to 
land  rent. 

160.  Relation  of  Land  Rent  to  Other  Rents. 

The  law  of  diminishing  returns  is  indeed  the  foundation  of 
the  law  of  rent.  A  farmer  will  sometime  reach  a  point  where 
it  will  not  pay  him  to  add  another  laborer  or  another  machine 
to  his  land,  because  beyond  the  margin  of  profitable  expendi- 
ture every  additional  "dose"  of  capital  or  labor  will  mean 
a  return  insufficient  to  cover  cost.  In  every  case  he  will  reach 
the  extensive  or  intensive  margin  of  the  utilization  of  land. 
This,  however,  is  not  peculiar  to  the  landowner.  The  capitalist 
will  also  reach  a  point  where  it  will  not  pay  him  to  buy  more 
machines  of  a  certain  kind,  or  to  build  another  factory  devoted 
to  some  particular  product ;  and  the  laborer  will  reach  the  point 
where  he  cannot  profitably  tend  more  looms.  The  law  of 
diminishing  returns  is  universal,  and  applies  to  everything  that 
possesses  value  (§  88).  If  it  explains  the  rent  of  land,  it  will 
equally  explain,  as  we  shall  see,  the  interest  of  capital  and  the 
wages  of  labor. 

Secondly,  it  is  said  that  land  rent  is  a  differential  or  surplus. 
So,  however,  is  every  other  kind  of  rental  value.  The  value 
of  everything  is  a  differential  or  surplus  as  compared  with  the 
value  of  something  else  lower  down  in  the  scale.  It  may  be 
claimed  that  land  rent  differs  from  other  rents  in  that  the  land 
at  the  margin  is  no-rent  land,  and  that  land  rent  is  therefore 
due  to  the  differences  in  the  productivity  of  good  land  over 


374  Rent.  .     [§  160 

no-rent  land.  To  this  the  obvious  rejoinder  may  be  made  that 
we  can  equally  well  speak  of  the  no-rent  machine  or  the  no- 
rent  factory.  The  reason  that  we  do  not  commonly  use  such 
terms  is  because  machines  and  factories  are  not  so  frequently 
rented  as  is  land.  The  principle,  however,  is  identical.  The 
land  at  the  margin  may  be  so  poor  that  no  rent  will  be  'paid 
for  its  use ;  but  the  machine  at  the  margin  may  also  be  worth- 
less in  just  the  same  sense.  In  fact,  as  we  have  seen  in  the 
last  chapter,  the  existence  of  profits  depends  upon  the  surplus 
earnings  of  the  intramarginal  producers.  It  makes  no  differ- 
ence whether  the  marginal  producer  uses  poor  land  or  poorly 
situated  land  or  poor  machinery  or  poor  buildings  or  poor 
workmen,  he  will  earn  no  surplus.  From  this  point  of  view 
rent  is  analogous  to  profit :  profit  is  the  surplus  over  the  income 
of  the  no-profit  producer ;  rent  may  be  said  to  be  the  surplus 
over  the  income  from  the  no-rent  commodity.  This  has  led 
some  writers  like  Walker  to  maintain  that  the  laws  of  profit 
and  rent  are  identical. 

It  would  be  an  error,  however,  to  press  too  closely  this 
analogy  between  rent  and  profit.  In  the  first  place,  rent  is  a 
surplus  only  in  the  sense  that  everything  positive  is  a  surplus 
over  zero,  —  a  statement  which  is  of  little  help.  The  rent  of  a 
boat  is  a  surplus  over  that  of  a  no-rent  boat ;  the  wages  of  a 
laborer  is  a  surplus  over  that  of  the  convict  or  no- wage  laborer ; 
the  interest  of  capital  is  a  surplus  over  the  capital  so  invested 
as  to  earn  no  interest.  But  secondly,  if  we  regard  rent  as  a 
surplus,  it  differs  from  profit  in  that  rent  is  a  permanent,  and 
profit  a  transitory,  surplus.  If  a  machine  is  used  in  a  factory, 
a  certain  part  of  the  product  will  be  traceable  to  it ;  that  is,  it 
will  earn  a  certain  return  or  rent  for  its  owner.  Under  free 
competition  the  price  of  that  machine  will  be,  as  we  know,  the 
capitalization  of  its  rent,  due  regard  being  had  to  the  number 
of  machines.  In  a  state  of  normal  equilibrium  the  conditions 
of  supply  and  demand  will  so  adjust  themselves  that  the  mar- 
ginal producer  will  in  the  long  run  give  for  a  commodity  only 
what  he  can  get  out  of  it,  and  others  will  not  give  more.  If 


§  160]  Land  Rent.  375 

all  the  machines  are  precise  duplicates  and  are  worked  under 
the  same  conditions,  their  earnings  or  rent  will  in  the  long  run 
be  equivalent  to  the  interest  on  the  capital  invested  in  them. 
It  will  be  a  permanent  return  as  long  as  the  machines  work  in 
unimpaired  efficiency.  If  the  machines  did  not  earn  the  rent, 
no  one  would  buy  them  at  that  capitalized  price.  On  the  other 
hand,  the  only  way  in  which  profits  can  be  secured  is  by  the 
owner  working  his  machine  under  different  conditions,  that  is, 
by  giving  it  more  care  and  combining  it  with  different  propor- 
tions of  labor  or  land,  taking  advantage  of  variations  in  the 
market,  and  so  on.  These  profits,  as  we  know,  are  under  com- 
petitive conditions  essentially  transitory,  and  will  disappear  un- 
less renewed  by  the  use  of  new  machines  or  a  new  shifting  of  the 
productive  factors.  If  better  machines,  however,  are  used,  the 
surplus  gains  secured  by  the  producer  are  really  the  difference 
in  the  rent  or  product  of  the  good  machine  over  that  of  the 
poorer  machines  of  his  competitors.  To  the  extent  that  his 
profits  are  a  differential  derived  solely  from  the  use  of  the 
better  machine,  he  can  enjoy  them  only  as  long  as  he  guards 
the  secret,  that  is,  as  long  as  he  retains  a  monopolistic  advan- 
tage. Even  in  the  case  of  monopoly,  however,  the  profit,  as  we 
know,  will  disappear  through  the  process  of  capitalization  as 
soon  as  the  machine  or  the  business  changes  hands.  Thus, 
while  the  rent  is  permanent,  the  profit  is  transitory. 

Precisely  the  same  is  true  of  land  rent.  If  in  a  certain 
section  of  a  city,  where  for  a  long  time  there  has  been  no 
change,  there  are  a  hundred  equally  desirable  contiguous  lots, 
each  of  them  will  rent  for  the  same  amount.  The  rent  is  a 
differential  only  as  compared  with  less  eligible  sites  yielding  a 
lower  rent,  and  finally  with  land  on  the  outskirts,  which,  like 
the  Hoboken  flats  near  New  York,  is  worthless  for  residential, 
business,  fanning  or  other  purposes,  and  which  therefore  has 
no  capital  value  because  it  yields  no  rent  and  no  product. 
Competition  between  each  of  the  hundred  lots  will  keep  the 
rent  of  all  at  a  point  corresponding  to  the  interest  on  their 
capital  value.  The  landowner  can  earn  no  surplus  on  this 


376 


Rent.  [§  161 


investment  as  long  as  conditions  do  not  change.  If,  however, 
a  new  street  is  opened,  or  for  som.e  reason  one  of  the  lots 
acquires  a  higher  rent,  the  landowner  will  secure  a  surplus  over 
the  interest  on  the  original  purchase  price.  Whether  this  sur- 
plus is  called  profit  or  rent  is  often  thought  to  be  immaterial ; 
in  point  of  fact,  when  a  man  sells  his  land  he  calls  it  profit ; 
but  until  he  sells  he  calls  it  rent.  Strictly  speaking,  however, 
the  rent  is  the  total  periodic  return  of  the  land,  the  profit  only 
the  surplus  of  the  periodic  or  capitalized  return  over  the  cost, 
or  in  this  case  over  the  interest  on  the  invested  capital.  As 
soon  as  the  plot  is  again  sold,  the  price  which  yields  the  old 
owner  the  profit  is  necessarily  the  price  at  which  the  rent  will 
yield  the  new  owner  only  interest  on  the  capital.  Profits  are 
thus  automatically  extinguished  by  transfers.  Rent  is  perma- 
nent as  long  as  the  rent-bearing  investment  lasts ;  profit  disap- 
pears each  time  that  it  is  capitalized  into  a  new  selling  price. 
The  difference  between  rent  and  profit  is  applicable  to  land 
just  as  to  other  things. 

161.  Rent  and  Price. 

Thirdly,  it  is  stated  that  land  rent  is  not  a  part  of  cost,  and 
that  high  rents  are  therefore  a  result,  not  a  cause,  of  high 
prices.  It  is  no  doubt  true  that  if  wheat  is  raised  on  land 
which  differs  in  fertility  or  situation,  competition  will  force  the 
price  of  all  the  wheat  of  the  same  grade  up  to  the  cost  of 
the  marginal  producer,  that  is,  the  farmer  on  the  poorest  land. 
The  intramarginal  farmer  will  secure  a  surplus ;  and  if  we  call 
this  differential  surplus  rent,  it  may  be  said  that  this  differential 
does  not  enter  into  the  price.  Precisely  the  same,  however,  is 
true  of  every  other  share  in  distribution.  Substitute  for  the 
plots  of  land  sewing-machines  rented  out  by  the  month  or 
year.  Some  of  the  machines  will  turn  out,  let  us  say,  more 
vests  of  the  same  quality  than  others.  All  the  vests  will  sell 
at  the  same  price,  namely,  the  cost  of  the  marginal  producer 
with  the  poorest  machine,  and  the  difference  between  the 
marginal  product  and  the  output  of  the  better  machine  will 


§  161]  Rent  and  Price.  377 

under  competitive  conditions  go  as  a  surplus  rent  to  the  owner 
of  the  better  machine.  The  surplus  seems  to  be  not  a  part 
of  the  price.  Again,  different  employers  may  utilize  different 
grades  of  workmen  to  fell  trees  or  to  build  railways.  One  uses 
a  three-dollar  American,  another  a  two-dollar  French  Canadian, 
another  a  dollar  Italian.  Yet,  as  Lord  Brassey  discovered  in 
railway  construction,  the  high-price  workman  is  not  really 
more  expensive,  because  his  output  is  greater.  If  he  did  not 
earn  the  higher  wage,  he  would  not  in  the  long  run  get  it. 
Since  all  the  trees  sell  at  the  same  price,  as  fixed  by  the  mar- 
ginal producer  who  is  using  the  least  efficient  workmen,  the 
higher  wage  of  the  American  represents  a  surplus  product  or 
labor  rent  over  the  low  wage  of  the  Italian.  If  we  say  that 
the  higher  rent  of  the  good  land  does  not  enter  into  the  price 
of  wheat,  we  can  equally  well  say  that  the  higher  wage  which 
represents  the  surplus  product  of  the  American  does  not  enter 
into  the  price  of  trees.  The  good  land  rents  or  sells  for  more 
because  it  produces  more,  —  the  rent  is  the  product :  the 
high-grade  laborer  secures  higher  wages  because  he  produces 
more,  —  the  wage  is  the  product.  The  wages  of  every  differ- 
ent grade  of  workman  are  a  differential  in  the  same  sense  as 
the  rent  of  different  grades  of  land  or  capital  is  a  differential. 

It  will  be  said,  however,  that  there  is  a  distinction,  because 
even  the  lowest  wages  are  beyond  peradventure  a  part  of  the 
cost.  So,  however,  is  the  rental  paid  for  the  worst  wheat  land. 
The  confusion  arises  from  supposing  that  the  worst  wheat  land 
is  no-rent  land.  It  is  indeed  no-wheat-rent  land;  but  this 
may  still  be  worth  a  considerable  sum  per  acre,  because  it  can 
be  used  for  other  purposes.  If  the  farmer  cannot  permanently 
earn  an  income  from  wheat,  he  will  raise  other  less  valuable 
cereals,  or  vegetables,  or  hay,  or  use  the  land  for  pasture.  Every 
piece  of  marginal  land  —  that  is,  the  poorest  land  in  use  for 
some  particular  product  —  is  worth  something  for  the  raising 
of  a  less  valuable  product,  until  we  finally  reach  land  that  is 
worth  nothing  for  any  purpose.  In  the  cost  of  the  wheat,  there- 
fore, there  must  always  be  included  the  rent  which  the  marginal 


378  Rent.  [§  161 

(or  no-wheat-rent)  land  would  earn  if  employed  for  the  next 
lower  use. 

Furthermore,  not  only  must  the  marginal  rent  always  be  in- 
cluded in  cost  and  therefore  in  price,  but  in  a  higher  sense 
the  differential  rent,  as  a  permanent  phenomenon,  is  also  a 
part  of  price.  The  rent  of  anything  is  its  product ;  the  greater 
product  of  the  better  land  forms  as  much  an  element  of  the 
supply  as  the  smaller  product  of  the  poorer  land,  and  price  de- 
pends on  the  relation  of  the  total  supply  to  the  total  demand. 
If  the  better  land  yielded  less,  the  total  supply  would  be 
smaller  and  the  price  would  rise,  thus  leading  to  the  culti- 
vation of  a  new  marginal  land.  Price  in  general,  as  we  know 
(§  112),  is  not  fixed  by  the  marginal  or  maximum  cost  but 
at  the  marginal  cost,  and  the  margin  depends  upon  the  output 
of  the  better  grades,  receding  as  this  increases,  advancing  as 
it  falls.  Every  bushel  of  wheat,  whether  it  comes  from  good 
or  poor  land,  affects  the  supply,  the  price  and  the  margin. 

To  say  that  rent  does  not  enter  into  price  is  doubly  con- 
fusing, not  only  because  it  implies  that  land  rent  differs  in 
this  respect  from  other  rents,  but  also  because  the  general 
statement  is  itself  misleading.  If  two  different  instruments  or 
two  different  grades  of  the  same  instrument  are  permanently 
used  to  produce  a  certain  commodity,  their  rent  or  permanent 
contribution  to  the  product  will  of  course  differ.  If  the  owner 
of  the  better  grade  is  magnanimous  enough  to  present  this 
permanent  surplus  to  the  one  who  rents  the  instrument,  that  is, 
if  he  remits  the  rent,  it  will  indeed  make  no  difference  in  the 
price  as  long  as  the  product  is  finally  sold  on  the  market.  In 
this  sense  only  can  it  be  said  that  rent  does  not  enter  into 
price ;  for  the  price  will  be  uninfluenced  by  the  fact  whether 
the  owner  retains  or  foregoes  the  rent.  If  he  remits  the  rent, 
it  will  disappear  so  far  as  he  is  concerned,  and  the  rent  will 
in  that  sense  not  enter  into  price.  It  is  clear,  however,  that 
what  really  disappears  is  not  the  rent,  but  its  original  owner- 
ship. The  rent  still  exists,  although  it  is  now  in  the  hands 
of  the  tenant.  If  a  sewing-machine  company  gave  certain 


§  162]  Growth  of  Land  Rent.  379 

operators  the  use  of  the  machine  free  of  rent,  and  if  the 
vests  were  sold  at  an  unchanged  price,  the  rent  would  stay  in 
the  hands  of  the  operators  instead  of  the  company.  The  only 
way  the  rent  can  be  made  to  disappear  is  to  destroy  the 
product.  The  transfer  of  ownership  does  not  blot  it  out.  The 
rent  of  the  better  instrument  is  the  product  of  the  better  instru- 
ment. Each  unit  in  the  supply  is  a  part  of  the  total  product 
or  total  rent,  and  must  therefore  affect  the  price.  Hence 
the  rent  or  product  of  any  instrument  of  production,  whether 
it  be  land  or  capital  or  labor,  whether  it  be  marginal  or  differ- 
ential rent,  is  really  an  element  in  the  price,  in  the  sense  that 
were  it  not  for  that  product  the  price  would  be  different. 
Land  is  here  in  precisely  the  same  position  as  other  things. 

Notwithstanding  these  analogies  of  land  rent  to  other  rents, 
however,  there  remains  one  difference  to  which  attention  has 
already  been  called.  In  the  case  of  so-called  manufactured 
commodities,  increase  of  demand  and  production  often  goes 
hand  in  hand  with  lower  price  ;  in  the  case  of  land  increase  of 
demand  generally  means  higher  price.  The  supply  does  not 
respond  to  the  demand  with  the  same  rapidity.  Land  is 
indeed  not  alone  in  this  respect,  for  the  same  is  true  of  many 
things  that  cannot  be  duplicated  or  easily  reproduced.  Land 
is,  however,  of  such  overwhelming  importance,  as  compared  to 
those  other  things,  that  when  we  consider  its  influence  on  the 
progress  of  value'  it  is  usefully  contrasted  with  them.  We 
shall  therefore  proceed  to  consider  more  specifically  the  rent 
of  land. 

162.   Growth  of  Land  Rent. 

A  distinction  is  sometimes  drawn  between  land  rent  and 
ground  rent :  the  former  is  the  rent  of  land  for  securing 
some  material  produce,  the  latter  the  rent  of  ground  used  as  a 
building  site.  Practically  the  distinction  is  one  between  agri- 
cultural and  urban  land.  Strictly  speaking,  however,  rural  land 
can  be  utilized  for  other  than  agricultural  purposes,  while 
land  within  the  city  limits  is  sometimes  used  for  agriculture. 


380  Rent.  [§  162 

According  to  some  authors  land  rent  arises  from  the  fact  that 
the  price  of  agricultural  products  is  the  same  while  the  cost 
of  production  differs ;  ground  rent,  from  the  fact  that  prices 
differ  while  the  cost  of  production  remains  the  same.  This, 
however,  is  inaccurate.  Ground  rents  differ  for  precisely  the 
same  reason  as  land  rents,  that  is,  because  city  lots,  like 
country  tracts,  vary  in  their  power  of  affording  utilities.  Both 
are  productive,  even  though  they  produce  different  kinds 
of  utilities ;  the  rural  land  has  a  value  because  its  material 
products  are  wanted,  the  urban  land  because  it  is  needed  as  a 
support  of  a  house  or  the  meeting-place  of  human  beings. 
To  assert  that  the  value  of  land  is  due  to  fertility  or  in- 
equality or  scarcity  or  monopoly  is  either  half  true  or  inade- 
quate. Situation  is  as  important  as  fertility.  Inequality  is  a 
measure  of  the  difference  in  value,  not  the  cause  of  value. 
Scarcity  is  an  ingredient  in  the  value  of  every  economic  good. 
Monopoly  may  perhaps  be  predicated  of  particularly  choice 
sites,  but  hardly  of  land  in  general,  the  different  qualities  of 
which  shade  into  each  other  by  imperceptible  gradations,  from 
the  vast  mass  of  unoccupied  land  upward.  The  rent  of  each 
piece  of  land  is  due  to  its  productive  efficiency,  and  the  rental 
value  of  any  plot  is  the  expression  of  its  marginal  contribution 
to  the  product. 

In  discussing  the  growth  of  rent,  therefore,  the  location  of  the 
margin  becomes  of  importance.  We  must  remember  the  dis- 
tinction in  §  73  between  the  economic  and  the  non-economic 
margin.  The  margin  may  be  at  such  a  point  that  the  value  of 
the  contribution  is  zercr.  Here  we  have  the  non-economic 
margin.  This  may  be  due  to  the  fact  that  the  land  is  either  so 
abundant  or  so  poor  in  situation  or  fertility  that  the  value  of 
the  produce  will  only  just  remunerate  the  labor  or  the  capital 
employed.  The  product  must  normally  suffice  to  pay  current 
wages  on  that  grade  of  labor  or  current  interest  on  that  class  of 
capital,  because  otherwise  that  labor  and  that  capital  would  be 
withdrawn  to  other  enterprises.  But  there  will  be  no  surplus. 
The  land,  in  other  words,  will  yield  no  rent,  because  its  contri- 


§  162]  Growth  of  Land  Rent.  381 

bution  at  the  margin  is  zero.  The  value  of  the  joint  product  is 
due  wholly  to  the  labor  and  the  capital. 

If,  however,  population  grows  so  that  the  same  product  now 
acquires  an  increased  value,  there  will  be  a  surplus  ascribable 
to  the  land.  If  all  the  land  were  of  the  same  grade,  and  if  it 
remained  unaltered  in  quantity,  this  surplus  would  be  divided 
equally.  Since,  however,  land  differs  in  fertility  and  situation, 
any  increase  in  the  demand  will  result  in  the  better  grades 
securing  the  greater  part  of  the  surplus,  while  the  land  formerly 
at  the  margin  will  yield  a  small  surplus,  and  land  hitherto  un- 
utilized will  become  a  new  margin,  yielding  mere  wages  and 
interest.  If  for  some  reason  the  supply  of  land  cannot  be  in- 
creased beyond  a  given  point,  the  intensive  margin  will  be 
moved  up,  and  the  marginal  or  poorest  land  will  now  also  yield 
a  surplus.  The  intensive  margin  now  becomes  a  base  from 
which  the  surplus  of  all  land  is  calculated. 

The  simplest  illustration  is  urban  land.  If  a  cross  roads 
hamlet  springs  up  in  the  centre  of  an  agricultural  district,  the 
land  previously  of  use  only  for  farming  purposes  yields  an  ad- 
ditional rent  as  the  site  of  cheap  wooden  structures.  The 
margin  has  been  extended.  As  population  and  prosperity  in- 
crease, the  hamlet  grows  into  a  village,  a  town,  a  city,  and  the 
successive  tracts  acquire  a  rent  so  high  that  the  cottage  gives 
way  progressively  to  the  brick  building,  the  stone  mansion  and 
the  steel  sky-scraper.  Just  as  we  speak  of  pasture  land  or 
wheat  land  or  truck  gardening  land,  so  we  can  speak  of  cottage 
sites,  brick-building  sites,  stone-mansion  sites  and  sky-scraper 
sites.  Each  class  of  land  can  be  best  utilized  for  certain  pur- 
poses, and  there  are  as  many  margins  as  there  are  classes. 
With  every  change  each  margin  is  pushed  farther  out,  the  dif- 
ference in  the  rent  of  all  intermediate  sections  being  finally  in 
proportion  to  the  distance  of  the  lowest  margin  or  suburban 
farm  area  from  the  centre.  The  location  of  the  margin  de- 
pends on  the  extent  of  the  demand  as  modified  by  the  means 
of  transportation.  Each  addition  to  the  demand  will  call  forth 
an  addition  to  the  total  supply,  but  since  this  addition  can 


382 


Rent.  [§  162 


come  only  at  the  fringe,  it  is  an  increase  of  less  eligible  land. 
Increased  demand  for  houses  can  be  met  by  building  equally 
good  houses ;  increased  demand  for  sites  can  be  met  only  by 
less  eligible  sites.  Under  ordinary  conditions  of  progress,  there- 
fore, ground  rent  may  be  expected  constantly  to  increase. 

The  expectation  may,  however,  be  frustrated  not  only  by  the 
fact  that  different  sections  of  the  city  may  prosper  unequally, 
but  also  by  the  fact  that  an  improvement  in  the  means  of  trans- 
portation may  decrease  the  relative  eligibility  and  therefore  the 
rent  of  intermediate  sections.  These  practical  considerations 
have  an  important  bearing  on  the  problem  of  the  shifting  of  a 
tax  on  ground  rent  as  compared  to  house  rent. 

In  the  case  of  land  rent  the  interference  with  the  normal 
growth  is  more  pronounced  than  in  the  case  of  ground  rent. 
While  it  is  ordinarily  true  that  the  best  lands  will  be  first  culti- 
vated, it  has  happened  in  many  parts  of  the  world  that  the  less 
fertile  lands  on  the  hillsides  were  preferred  because  they  were 
relatively  safe  from  the  incursions  of  marauders.  With  the  ad- 
vent of  peaceful  conditions,  recourse  was  had  to  the  better 
lands  in  the  plains  or  valleys,  with  an  ensuing  fall  in  the  rent  of 
the  original  tracts.  The  same  result  is  often  brought  about  by 
the  opening  of  fertile  lands  in  newer  sections.  The  entrance 
of  the  middle  and  far  West  into  the  international  market,  with 
the  consequent  increase  of  supply  and  lower  price  of  wheat,  has 
resulted  in  a  great  fall  in  rents  in  those  parts  of  New  England 
and  Europe  exposed  to  the  competition.  Finally  is  to  be 
noticed  the  effect  of  agricultural  improvements.  If  they  apply 
to  all  lands,  they  will  lessen  the  cost,  make  possible  the  relocation 
of  a  new  and  lower  margin,  and  reduce  the  price  and  therefore 
the  rent  of  all  lands.  If  the  improvements  remain,  for  a  time 
at  least,  the  exclusive  possession  of  the  more  ingenious  or 
capable  farmers,  whereby  their  share  of  the  increased  output 
more  than  outweighs  the  reduction  in  price,  their  rents  will  in- 
crease. If  this  advantage  accrues  to  entire  sections  or  coun- 
tries, the  rent  in  them  will  grow  at  the  expense  of  the  others, 
just  as  in  consequence  of  improvements  in  transportation  the 


§  163]  Land  Rent  and  Tenure.  383 

rents  in  the  far  West  of  America  have  increased,  while  those  in 
New  England  have  diminished. 

Whether  land  rents  in  general,  at  any  given  period,  will  in- 
crease or  decrease  depends  therefore  on  the  relation  of  popu- 
lation to  land.  Growth  of  population  or  an  elevation  of  the 
standard  of  life  means  increased  demand;  improvements  in 
production  or  transportation  mean  increased  supply.  When 
the  population  keeps  ahead  of  the  improvements,  rents  will 
rise.  When  the  improvements  keep  ahead  of  the  population, 
rents  will  fall.  Since,  however,  the  demand  for  food  is  nowa- 
days of  an  international  character,  a  rise  of  rent  in  those  coun- 
tries or  sections  which  possess  or  retain  the  advantage  of  the 
improvements  will  still  be  compatible  with  a  general  increase 
in  population.  In  modern  times  the  increase  of  population  is 
more  and  more  due  to  the  growth  of  industry,  which  is  again 
ascribable  to  improvements  in  production.  At  bottom,  therefore, 
the  growth  of  rent  depends  on  the  relative  rapidity  of  improve- 
ments in  industry  as  compared  with  those  in  agriculture  or  in 
industry  applied  to  agriculture.  Since  there  is  on  the  whole  a 
broader  field  for  industrial  improvement,  it  may  be  surmised 
that  ultimately  land  rents  will  normally  rise.  For  long  periods 
in  history,  however,  land  rents  may  remain  stationary  or  even 
decline,  not  only  in  particular  countries,  as  at  present,  but  in 
the  world  at  large. 

163.  Land  Rent  and  Land  Tenure. 

Since  land  rent  is  the  permanent  surplus  or  periodic  prod- 
uct of  the  bare  land,  it  is  to  be  distinguished  from  what  often 
seems  to  be  the  total  return  of  the  land.  If  a  man  works  the 
land,  a  part  of  the  product  is  really  wages ;  if  he  applies  con- 
crete capital  to  the  land,  another  part  is  really  the  rent  of 
those  instruments,  which  in  the  long  run  must  be  equivalent 
to  the  interest  on  the  capital  invested  in  them ;  if  he  com- 
bines the  factors,  so  that  for  the  time  being  he  can  undersell 
his  competitors  or  secure  a  greater  output  at  the  same  price, 
still  another  part  of  the  product  is  profits.  The  wages  and 


384 


Rent.  [§  163 


the  interest  are  permanent ;  the  profits  will  disappear  as  soon 
as  they  are  capitalized  into  a  higher  selling  value  of  the  land 
or  as  soon  as  the  methods  of  the  more  successful  cultivator 
become  general. 

When  a  farmer  owns  and  works  the  land,  it  is  difficult  to 
distinguish  these  various  shares  in  the  product.  When  the 
owner  supplies  the  land  and  part  of  the  capital  to  the  tenant 
who  does  the  work,  it  is  slightly  easier  to  disentangle  the 
shares.  When  the  proprietor  furnishes  the  land  and  the  ten- 
ant does  all  the  rest,  we  have  the  simplest  example.  In  such 
a  case  the  contract  rent  paid  by  the  tenant  in  money  or  in  kind 
is  the  economic  land  rent  proper ;  the  surplus  above  the  con- 
tract rent  represents  his  wages  as  well  as  the  interest  on  his 
invested  capital  and  his  profits.  The  wages  and  interest,  as  we 
shall  soon  learn,  are  fixed  amounts,  while  any  excess  which  he 
can  for  the  time  being  retain  constitutes  his  agricultural  profits. 
If,  however,  the  profits  are  due  to  improvements  the  secret  or 
knack  of  which  the  tenant  cannot  permanently  retain  —  as, 
for  instance,  the  use  of  new  manures  or  of  better  crop  rota- 
tion—  they  will  disappear.  According  to  the  conditions  of 
the  market  the  surplus  will  either  be  dissipated  into  lower 
prices  for  the  produce,  or,  on  the  contrary,  will  be  converted 
into  a  higher  rental  value  of  the  land.  The  only  permanent 
constituents  of  the  output  or  price  under  competitive  condi- 
tions are  wages,  interest  and  rent. 

The  contract  rent  paid  in  money  or  in  kind  for  any  plot  of 
land  thus  tends  under  competitive  conditions  to  be  equal  to 
that  sum  which  will  just  enable  the  marginal  or  least  efficient 
tenant  to  make  normal  wages  and  interest.  From  the  point  of 
view  of  profits  it  is  a  non-economic  margin  (§  73)  ;  from 
that  of  interest  or  wages,  an  economic  margin.  That  is,  the 
tenant  at  the  margin  makes  no  profits,  but  if  he  did  not  get 
back  his  interest  on  capital  he  could  not  afford  in  the  long  run 
to  use  the  capital,  and  if  he  did  not  earn  current  wages  he 
would  become  a  wage-earner.  The  competition  for  different 
plots  of  equally  good  land  tends  to  force  the  rent  up  to  the 


§  163]  Land  Rent  and  Tenure.  385 

point  where  no  profits  are  left  for  the  least  efficient  competitor. 
The  rent  paid  for  land  is  thus  the  amount  that  is  produced 
by  the  marginal  farmer  in  excess  of  wages  and  interest. 
Under  competitive  conditions  this  excess  goes  to  the  owner, 
while  any  temporary  surplus  goes  as  profits  to  the  tenant. 

Under  actual  conditions  the  contract  rent  may  diverge  from 
the  pure  economic  rent.  This  is  due  to  economic  friction. 
Economic  rent  may  be  defined  as  the  rent  which  an  intel- 
ligent tenant  who  enjoys  complete  mobility  of  labor,  who  has 
an  alternative  investment  for  his  capital  and  who  is  thor- 
oughly acquainted  with  the  conditions  of  the  market,  could 
afford  to  pay.  But  where  there  is  ignorance,  lack  of  opportu- 
nity or  lack  of  mobility  on  the  part  of  the  tenant,  actual  rent 
may  be  higher  than  economic  rent.  On  the  other  hand, 
where  for  social  or  other  reasons  the  owner  does  not  exact  the 
uttermost  farthing,  the  actual  rent  may  be  lower  than  the  eco- 
nomic or  rack  rent.  This,  however,  is  just  as  true  of  other 
rents  as  of  land  rents. 

While  the  simplest  form  of  land  rent  is  that  for  the  use  of 
the  bare  land,  experience  has  shown  the  utility  of  a  different 
method.  This  is  known  in  Europe  as  the  metayer  plan  and  in 
America  as  the  share  system,  because  the  owner  and  tenant 
share  in  the  factors  of  production  and  therefore  in  their  re- 
muneration. Share  tenure  is  thus  contrasted  with  cash  tenure, 
where  the  tenant  pays  a  cash  sum  for  the  use  of  the  land  and 
keeps  the  rest  of  the  product.  The  most  complete  develop- 
ment of  this  has  taken  place  in  the  Southern  states,  where  no 
less  than  three  important  variations  of  the  share  system  are 
found.  They  are  known  as  the  cropping  system,  the  "  third 
and  fourth  "  and  "  standing  rent  "  methods.  In  all  cases  the 
owner  furnishes  free  of  charge  a  dwelling-house,  wood  and 
water,  pasture  for  pigs  and  cows  and  a  small  plot  for  a  truck 
patch.  In  the  cropping  system  the  tenant  or  cropper  does  all 
the  work  and  supplies  his  own  food ;  the  landlord  furnishes 
seed,  farming  implements,  animals  and  half  the  fertilizer.  He 
also  bears  half  the  expense  of  ginning  and  wrapping  the  cot- 

25 


386 


Rent.  [§  163 


ton.  The  crop  is  then  divided  equally,  and  the  system  is  hence 
sometimes  called  farming  "on  halves."  In  the  " third  and 
fourth "  system  the  owner  provides  everything  except  the 
labor,  the  tenant  getting  one-fourth  of  the  crop ;  or  the  tenant 
furnishes  in  addition  his  own  food  and  receives  one- third  of 
the  crop.  More  commonly,  however,  the  same  name  is 
applied  to  the  system  where  the  tenant  furnishes  labor,  tools 
and  animals,  while  the  owner  gives  only  the  house  and  land,  and 
therefore  receives  only  one-third  of  some  crops,  like  grain,  and 
a  quarter  of  others,  like  cotton  That  is,  the  landlord  and  not 
the  tenant  gets  the  third  or  the  fourth  part  of  the  product. 
In  such  cases  the  "  third  and  fourth  "  renter  occupies  a  rela- 
tively higher  position  than  the  mere  cropper.  In  the  case  of 
"  fixed  "  or  "  standing  rent "  the  landlord  furnishes  nothing 
except  the  minimum  mentioned  above  as  common  to  all  share 
systems,  and  likewise  exercises  no  supervision  over  the  labor  of 
the  tenant.  The  "  standing  rent  "  system  always  calls  for  the 
production  of  some  specific  commodity,  while  in  the  money  or 
cash  rent  system  the  tenant  is  free  to  do  as  he  likes.  "  Standing 
rent "  is  thus  the  nearest  approach  of  the  share  rent  to  the 
money  rent,  and  is  naturally  the  one  suited  to  the  better  grade 
of  tenants.  In  Europe  other  variations  of  the  system  are 
introduced  by  the  apportionment  of  taxes  between  owner  and 
tenant. 

The  subject  of  land  tenure  has  become  so  important  because 
of  the  connection  between  the  payment  of  the  rent,  the  energy 
of  the  cultivator  and  the  productivity  of  the  land,  as  well  as 
because  of  the  social  consequences  of  land  ownership.  Under 
the  feudal  system  there  was  an  almost  complete  divorce 
between  owner  and  cultivator.  With  the  growth  of  prosperity 
the  serf  gradually  became  a  free  tenant,  and  in  some  parts  of 
Europe  the  tenant  has  become  a  peasant  proprietor  or  inde- 
pendent farmer.  In  Ireland  the  transition  is  still  in  process, 
and  has  been  much  facilitated  by  the  series  of  laws  which 
began  in  the  seventies  and  culminated  in  the  Land  Purchase 
Act  of  1003.  In  the  United  States,  which  was  (except  in  the 


§  i63] 


Land  Rent  and  Tenure. 


387 


South)  almost  from  the  beginning  the  home  of  independent 
farmers,  there  has  been  during  the  past  few  decades  an  increase 
in  the  proportion  of  farm  tenants  to  farm  owners.  This  is 
apparent  from  the  following  table  : 


Year. 

Total 
Number  of 
Farms. 

Number  of  Farms  Operated  by 

PerCentof  Farms 
Operated  by 

E 
g 

o 

Cash 

Tenants. 

|| 

C/2  § 

h 

Owners. 

J| 

en 

11 

C/2   V 

The  United  States. 

1900 

5,739,657 
4,564,641 

3,269^728 

752,920 
454,659 

1,273,336 
840,254 

64-7 
71.6 

i3-i 

IO.O 

22.2 
I8.4 

1880 

4,008,907 

2,984,306 

322,357 

702,244 

74-5 

8.0 

North  Atlantic 

Division. 

677,506 

536,724 

66,361 

74,42i 

79-2 

9.8 

II.O 

658,569 

537,376 

52,120 

69,073 

81.6 

7-9 

10-5 

696,139 

584,847 

49,oii 

62,281 

84.0 

7.0 

9.0 

South  Atlantic 

Division. 

1900 
1890 

962,225 
749,600 

536,627 
461,057 

172,699 
96,098 

252,899 
i92,445 

55-8 
01.5 

17.9 

12.8 

26.3 

25-7 

l88o 

644,429 

74,946 

157,810 

63-9 

1  1.6 

24-5 

North  Central 

Division. 

2,196,567 

1,583,841 

207,732 

404,994 

72.1 

7-5 

18.4 

1,923,822 

1,474,086 

147,248 

302,488 

76.6 

97 

'5-7 

1,697,968 

1,350,225 

88,743 

259,000 

79-5 

S-2 

South  Central 

Division. 

1900 
1890 
1880 

1,658,166 
1,086,772 
886,648 

852,620 
668,972 
565,556 

286,091 
151,901 
105,092 

579,455 
265,899 
216,000 

51-4 
61.5 
63.8 

17-3 

14.0 
n.8 

24-5 
24.4 

Western  Division. 

1900 

242,908 

202,596 

18,782 

21,53° 

83-4 

7-7 

8.9 

1890 

145,878 

128,237 

7,292 

10,349 

87.9 

5-° 

1880 

83,723 

72,005 

4,565 

7,i53 

86.0 

5-5 

s.l 

Alaska  &  Hawaii. 

1900 

2,285 

963 

T'255 

67 

42.1 

54-9 

3-o 

It  would,  however,  be  a  mistake  to  assume  that  the  tenants 
are  growing  at  the  expense  of  owners.  Both  owners  and  ten- 
ants are  increasing,  even  though  the  tenants  are  increasing 


388 


Rent.  [§  164 


faster.  In  1900  there  was  one  farm  owned  for  every  14 
persons  outside  of  cities  of  8,000  inhabitants  and  over.  In 
1850  the  ratio  of  all  farms  of  whatever  description  to  the  pop- 
ulation outside  of  such  cities  was  precisely  the  same  —  i  to  14. 
It  is  clear,  then,  the  number  of  farms  cultivated  by  the  owners 
has  grown  faster  than  the  non-urban  population.  This  means 
that  the  increase  of  tenants  has  come  not  from  previous  farm 
owners  or  their  families,  but  from  previous  farm  hands  or  hired 
men.  The  growth  of  farm  tenancy,  therefore,  is  a  step  forward, 
not  backward,  in  the  condition  of  American  agriculture.  The 
burning  problem  in  the  South  is  whether  the  negro  farmers 
possess  or  can  be  made  to  attain  the  qualities  fitting  them  for 
successful  tenant  farmers  rather  than  for  laborers  on  the  large 
plantations,  which  are  again  beginning  to  develop. 

164.  Justification  of  Land  Rent. 

The  question  of  the  justification  of  rent  is  one  not  of  its  ex- 
istence, but  of  its  disposition.  Since  rent  is  as  much  a  part  of 
the  product  as  wages,  to  query  the  justification  of  rent  is  in 
one  sense  as  unmeaning  as  to  query  that  of  wages.  The  rent 
which  a  tenant  pays  is  fixed  by  economic  law ;  whether  he 
hands  it  to  a  private  individual  or  to  the  government  is  imma- 
terial so  far  as  its  existence  is  concerned.  The  point  at  issue  is  : 
who  should  get  the  rent,  the  individual  or  the  government. 

Private  property  in  land  rents  is  attacked  from  three  sides. 
The  communists  assail  it  because  they  condemn  all  private 
property.  The  socialists  assaij  it  because  they  hold  that  the 
private  control  of  any  factor  of  production,  except  that  of 
the  laborer  by  himself,  involves  a  robbery  of  the  laborer. 
The  land  nationalizers  and  single-taxers  assail  it  because  of  an 
alleged  distinction  between  land  and  capital.  Although  the 
arguments  of  these  three  assailants  are  mutually  destructive, 
we  shall  confine  ourselves  here  to  the  last  class,  inasmuch  as  the 
arguments  of  the  communists  and  socialists  are  not  peculiar 
to  property  in  land. 

According   to    the   single-taxers  land  rent  is  held  to  be  a 


§  164]  Justification.  389 

monopoly  privilege,  and  land  value  is  claimed  to  be  a  social 
product.  For  both  reasons  the  land  would  then  be  unsuited 
to  private  ownership. 

In  the  first  place,  however,  we  have  seen  that  monopoly  can- 
not well  be  predicated  of  land  in  general.  Worthless  land 
exists  in  abundance.  From  the  worthless  to  the  priceless 
lands,  however,  there  is  a  continual  gradation,  and  it  is  impos- 
sible to  say  where  relative  abundance  and  competition  stop 
and  monopoly  begins.  Even,  however,  if  the  fact  of  privilege 
is  substantiated,  it  is  not  competent  to  single  out  land.  Many 
other  privileges  are  granted  by  modem  society.  Patents  and 
copyrights  are  exceedingly  valuable,  even  if  temporary,  privi- 
leges. The  institution  of  inheritance,  whereby  society  confers 
upon  individuals  the  right  of  receiving  that  for  which  they  are 
in  no  wise  responsible,  is  a  privilege  which  in  importance 
almost  transcends  that  of  property  in  land.  Certain  corporate 
franchises  constitute  privileges,  the  value  of  which  may  be 
only  in  part  referable  to  the  land.  That  all. such  privileges 
should  be  .paid  for  is  indeed  a  legitimate  demand ;  but  to 
claim  that  this  payment  should  be  extended  to  the  point  of  the 
total  value  of  the  land  would  logically  lead  to  the  similar  claim 
that  the  total  value  of  all  inheritances,  franchises,  patents  and 
copyrights  should  be  taken  by  the  state. 

Secondly,  the  assertion  that  land  value  differs  from  other 
values  in  that  it  is  a  social  product  involves  the  contention  that 
the  value  of  other  things  is  an  individual  product.  Individual 
labor,  however,  has  never  by  itself  produced  anything  in  civil- 
ized society.  Take,  for  example,  the  workman  fashioning  a 
chair.  The  wood  has  not  been  produced  by  him ;  it  is  a  gift 
of  nature.  The  tools  that  he  uses  are  the  results  of  the  con- 
tributions of  others ;  the  house  in  which  he  works,  the  clothes 
he  wears,  the  food  he  eats  (all  of  which  are  necessary  in  civil- 
ized society  to  the  making  of  a  chair),  are  the  result  of  the 
contribution  of  the  community.  His  safety  from  robbery  and 
pillage  —  nay,  his  very  existence  —  is  dependent  on  the  cease- 
less co-operation  of  the  society  about  him.  How  can  it  be 


390  Rent.  [§  164 

said,  in  the  face  of  all  this,  that  his  own  individual  labor  wholly 
creates  anything?  If  it  be  maintained  that  he  pays  for  his 
tools,  his  clothing  and  his  protection,  it  may  be  answered  that 
the  land  purchaser  also  pays  for  the  land.  Nothing  is  wholly 
the  result  of  unaided  individual  labor.  No  one  has  a  right  to 
say,  "  This  belongs  absolutely  and  completely  to  me  because 
I  alone  have  produced  it."  All  value  is  a  social  product. 

It  may  be  contended,  indeed,  that  the  landowner  does 
nothing,  while  the  carpenter,  at  all  events,  does  something. 
This  can  apply,  however,  only  to  the  absentee  owner  of  agri- 
cultural land  or  to  the  holder  of  city  land.  Under  the  modern 
form  of  corporate  investment,  moreover,  even  this  distinction 
is  robbed  of  much  of  its  importance.  Suppose  that  I  invest 
my  capital  in  land  or  in  the  shares  of  a  street  railway,  a  news- 
paper or  a  bank.  At  the  end  of  ten  years  I  return  and  find 
that  land  values  have  increased,  but  I  also  find  that  the 
same  cause  —  the  growth  of  population  and  prosperity  —  has 
equally  enhanced  the  value  of  my  railway,  newspaper  and 
bank  stock.  It  is  indeed  true  that  the  growth  of  the  corpora- 
tion calls  for  a  continually  abler  manager,  but  the  only  contri- 
bution that  I  personally  have  made  to  the  increased  value 
may  be  a  chance  vote  by  proxy  for  a  new  board  of  directors. 
To  all  intents  and  purposes  the  increment  is  well-nigh  as 
"unearned"  in  the  one  case  as  in  the  other. 

It  may  nevertheless  be  conceded  that  'there  is  a  difference 
to  this  extent,  that  ultimately  the  ownership  of  the  capital  con- 
trols its  management  and  conditions  its  most  effective  social 
utilization.  This  difference,  however,  does  not  suffice  to  con- 
vert all  land  values  into  "  unearned  increments  "  and  to  make 
the  increased  values  of  other  things  "  earned."  At  best  it  can 
only  justify  a  somewhat  higher  rate  of  taxation  on  land.  The 
single-tax  movement  undoubtedly  has  a  practical  validity  to 
the  extent  that  it  emphasizes  the  advantages  of  exempting  cer- 
tain classes  of  personal  property  from  taxation  for  local  pur- 
poses ;  but  so  far  as  it  endeavors  to  abolish  every  other  form 
of  taxation,  or  so  far  as  it  purports  to  afford  a  solution  of  a 


§  164]  Justification.  391 

great  social  problem  by  confiscating  land  rents,  it  is  sadly  in- 
adequate. Private  property  in  agricultural  land  has  been 
developed  in  the  course  of  long  centuries  as  the  most  effective 
means  of  spurring  on  the  cultivator  to  the  best  methods,  and 
thus  uniting  individual  and  social  interests.  To  distinguish 
between  the  social  and  the  individual  causes  of  agricultural 
rent  is  impossible.  The  validity  of  agricultural  rents,  however, 
involves  that  of  other  land  rents  as  well.  It  is  only  when  the 
control  of  land  by  individuals  becomes  a  distinct  menace  to 
social  interests  that  its  rigid  regulation,  or  even  its  assumption 
by  the  community,  becomes  legitimate. 


CHAPTER   XXV. 
INTEREST. 

165.  References. 

T.  N.  Carver,  Distribution  (1904),  ch.  vi ;  J.  B.  Clark,  Distribution  (1899), 
chs.  xii,  xiii ;  F.  A.  Fetter,  Principles  (1904),  ch.  xvi;  A.  Marshall, 
Principles  (1898),  bk.  vi,  ch.  vi ;  G.  Cassel,  The  Nature  and  Necessity  of 
Interest  (1903) ;  E.  v.  Bohm-Bawerk,  Positive  Theory  of  Capital  (trans,  by 
Smart,  1891),  bk.  vii,  and  Recent  Literature  on  Interest  (trans,  by  Scott, 
1903) ;  N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  iv ;  F.  v.  Wieser,  Natural 
Value  (trans,  by  Malloch,  1893),  bk.  iv  ;  W.  S.  Jevons,  Theory  (1888),  ch. 
vii;  H.  Sidgwick,  Principles  (1883),  bk.  ii,  ch.  vi;  A.  W.  Flux, Principles 
(1904),  ch.  vi ;  M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch.  iii; 
J.  S.  Nicholson,  Principles, bk.  ii,  ch.  xiii;  J.  A.  Hobson,  Economics  (1900), 
ch.  viii ;  H.  R.  Seager,  Introduction  (1904),  ch.  xiv;  G.  Billeter,  Ge- 
schichte  des  Zinsfusses  im  Griechisch-rbmischen  Alterthum  bis  attf ' Jiistinian 
(1898) ;  W.  J.  Ashley,  English  Economic  History  (1893),  n>  ch- vi  5  H.  C. 
Lea,  Ecclesiastical  Treatment  of  Usury  (Yale  Rev.,  II,  1894);  G.  K. 
Holmes,  Usury  in  Law  and  Practice  (Pol.  Sci.  Quart.,  VII,  1892). 

166.  Nature  of  Interest. 

To  the  ordinary  man  interest  seems  to  be  the  payment  for 
a  loan  of  money,  precisely  as  wealth  seems  to  consist  of  a  sum 
of  money.  In  point  of  fact,  however,  interest  is  paid  for  the 
use  of  the  capital  which  the  money  represents.  It  is  the 
earnings  or  product  of  the  fund  of  capital,  just  as  rent  is 
the  earnings  of  the  individual  pieces  of  capital.  Interest  is 
commuted  rent,  or  the  calculation  form  of  rent.  Just  as  a 
business  man  must  deduct  the  rent  or  royalty  of  some  patented 
machine  used  by  him  before  computing  his  profits,  so,  if  he 
buys  the  machine  outright,  he  must  deduct  the  interest  on 
the  capital  invested  in  the  machine.  Whether  he  uses  his 

392 


§  166]  Nature  of  Interest.  393 

own  capital  or  borrows  it  is  immaterial ;  in  the  latter  case  it 
is  loan  or  contract  interest,  in  the  former  it  is  natural  or 
economic  interest.  The  distinction  is  the  same  as  that 
which  we  have  learned  between  contract  and  economic  rent. 
Whether  he  pays  the  interest  to  another  in  virtue  of  some 
contract  or  keeps  it  makes  no  difference.  The  amount  of 
interest,  however,  is  not  the  same  thing  as  what  is  usually 
called  the  rent  of  the  particular  machine.  For  the  fund  of 
capital  is  represented  by  many  other  concrete  commodities 
besides  machines.  Total  interest  is  always  total  net  rent ; 
that  is,  the  total  net  product  of  the  entire  fund  of  capital  must 
be  the  same  as  the  total  product  of  the  aggregate  of  all  the 
individual  pieces  of  capital.  But  this  is  very  different  from 
saying  that  the  interest  on  a  thousand  dollars  is  the  same  as 
the  annual  gross  rent  of  a  particular  machine  costing  a  thou- 
sand dollars. 

This  is  due  to  the  fact  that  rents  and  capital  values  of  single 
commodities  are  as  different  as  the  commodities  themselves. 
They  run  through  the  whole  gamut  of  value  from  zero  to  well- 
nigh  incalculable  sums.  Capital,  as  a  fund,  on  the  other  hand, 
is  a  unit.  Pieces  of  capital  are  heterogeneous ;  a  fund  of  cap- 
ital is  homogeneous.  There  is  no  rate  of  rents  or  of  capital 
values;  there  is  a  general  rate  of  interest.  Interest  on  a 
thousand  dollars  may  be  fifty  dollars ;  a  machine  and  a  horse 
may  cost  a  thousand  dollars,  and  yet  they  may  rent  for  very 
different  sums  because  of  their  unequal  durability.  If  all 
concrete  units  of  capital  were  alike  in  productivity  and  if 
there  was  no  question  of  durability,  rent  would  always  be  the 
same  as  interest.  It  is  precisely  because  individual  pieces  of 
capital  are  not  alike  that  rent  differs  from  interest,  although 
total  rent  must  always  equal  total  interest. 

The  statement  that  capital  as  a  fund  is  homogeneous  must 
not  be  misunderstood.  Two  identical  pieces  of  capital,  let  us 
say  two  machines,  may  yield  very  different  products,  because 
the  one  may  be  carefully  looked  after  and  the  other  badly 
neglected.  In  the  same  way  equal  amounts  of  capital  may  be 


394  Interest.  [§  166 

loaned  to  two  persons,  one  of  whom  may  be  expected  to  repay 
promptly,  while  in  the  other  case  there  may  be  a  risk.  Just 
as  the  two  machines,  although  technically  the  same,  are 
economically  different,  so  the  two  individual  sums  of  capital, 
although  in  one  sense  homogeneous  because  reduced  to  a 
fund  of  value,  are  yet  economically  and  from  the  point  of  view 
of  the  lender  different  productive  instruments  or  income-bear- 
ing agents.  Actual  interest  rates  on  loans  therefore  fluctuate 
with  the  degree  of  security  and  the  probability  of  repayment. 
Interest  rates  on  land  vary,  for  instance,  with  the  ratio  of  the 
loan  to  the  property.  In  New  York  City  in  1905  a  loan 
equal  to  one-half  the  assessed  value  of  the  land  could  be  secured 
for  four  per  cent,  a  somewhat  larger  sum  for  four  and  a  half 
per  cent,  and  about  three-quarters  of  the  value  for  five  per 
cent.  The  rate  of  interest  on  bonds  varies  from  slightly  over 
two  per  cent  on  government  loans  to  five,  six  or  seven  per 
cent  on  local  or  industrial  paper  of  more  doubtful  security. 
When  we  speak  of  the  fund  of  capital  as  homogeneous,  we 
refer  to  the  identity  of  potential  use,  not  to  the  conditions  of 
repayment.  A  study  of  the  normal  rate  of  interest  is  a  study 
of  natural  interest,  or  the  returns  from  the  use  of  capital  on 
the  assumption  of  complete  mobility,  free  competition  and  the 
presence  of  the  economic  motive.  The  fact  that  a  person 
who  has  borrowed  the  capital  and  pocketed  its  earnings 
chooses  not  to  repay  all  of  it,  will  affect  the  rate  at  which  that 
particular  person  or  other  persons  of  his  class  can  in  future  secure 
a  loan,  but  will  leave  untouched  the  normal  rate  of  interest  on 
good  security.  Risk  causes  a  fluctuation  from  the  normal  rate 
of  interest ;  it  does  not  affect  the  normal  rate  itself  which  is  paid 
on  capital  when  there  is  virtually  no  risk.  So  far,  of  course,  as 
there  is  an  element  of  risk  in  all  human  transactions,  the  cost  of 
this  minimal  risk  must  be  included  in  the  rate  of  inter- 
est. But  in  ordinary  "  gilt-edge  "  loans  this  may  be  practically 
disregarded. 

Interest  rates  not  only  fluctuate  on  loans  to  different  indi- 
viduals  or  classes,  but  vary  in  different  sections  or  parts  of 


§  i66]  Nature  of  Interest.  395 

the  same  country.  This  is,  however,  so  obviously  an  illus- 
tration of  the  fact  that  we  are  dealing  with  different  markets  as 
to  need  no  further  elaboration.  A  study  of  interest  rates,  like 
that  of  all  other  cases  of  value,  refers  to  conditions  in  a  given 
market.  If  the  study  discloses  the  general  principles  of  value 
in  a  market,  it  will  be  adequate  to  explain  the  relative  varia- 
tions in  different  markets. 

Another  seeming  exception  to  the  principle  that  interest  is 
the  earnings  of  a  homogeneous  fund  of  capital  is  afforded  by 
interest  rates  on  "  call  loans  "  in  financial  centres,  —  that  is,  on 
loans  which  may  be  called  or  terminated  at  will,  as  opposed 
to  ordinary  time  loans.  The  general  rate  of  interest  in  New 
York  may  be  four  or  five  per  cent,  but  in  the  parlance  of  Wall 
Street  "  money  may  be  worth  "  on  a  given  day  only  one  or  two 
per  cent  when  "  it  is  a  drug  on  the  market,"  and  may  at  another 
time  "  be  so  tight  "  as  to  command  an  interest  rate  of  several 
per  cent  a  week  or  several  hundred  per  cent  a  year.  The 
explanation  is  not  difficult.  Interest  in  general  is  paid  for  a 
fund  of  capital,  because  that  fund  ultimately  represents  some 
concrete  pieces  of  capital  that  afford  a  service.  The  manu- 
facturer invests  the  capital  in  new  machines  or  buildings,  the 
merchant  in  new  facilities  of  transfer,  the  farmer  in  more 
land  or  better  implements.  In  the  case  of  Wall  Street,  how- 
ever, what  is  wanted  is  not  capital  for  technical  production, 
but  capital  in  the  form  of  liquid  assets  or  a  disposable  surplus 
of  cash  to  meet  current  liabilities.  The  ordinary  rate  of  inter- 
est depends  upon  the  demand  and  supply  of  capital  for  pro- 
ductive purposes  ;  the  rate  of  interest  on  call  loans  depends 
on  the  demand  and  supply  of  the  fluctuating  mass  of  loanable 
funds  which  are  on  the  instant  convertible  into  cash.  The 
rate  of  interest  on  call  loans  may  be  high  when  the  general 
rate  of  interest  is  low.  In  the  case  of  call  loans  the  payment 
is  for  the  temporary  use  of  the  money  considered  as  a  com- 
modity in  itself;  in  the  case  of  ordinary  loans  the  payment  is 
for  the  use  of  an  aliquot  part  of  the  social  capital  of  the 
community. 


396 


Interest.  [§  167 


167.  Interest  and  Forbearance. 

We  have  learned  that  the  real  value  of  all  things  consists  in 
their  rents  or  actual  uses  and  that  the  fundamental  aspect  of 
value  is  rental  value.  We  have  also  learned  that  rental  values 
are  transmuted  into  capital  values,  and  that  capital  value 
depends  upon  a  succession  of  anticipated  income  or  rental 
values.  Finally,  we  have  learned  that  this  process  of  capitali- 
zation, or  of  estimating  the  present  worth  of  a  succession  of 
future  uses,  depends  upon  the  fact  that  menjiabitually  put  a 
lower  present  estimate  on  future  uses  than  on  present  uses. 
Interest  thus  involves  a  discounting  of  the~future  and  is  a  nat- 
ural phenomenon  because  it  represents  a  natural  discount.  It 
corresponds  to  the  difference  in  the  time  utility  of  things,  as 
actual  rents  or  usufructs  correspond  to  differences  in  material 
utility. 

In  the  case  of  more  or  less  durable  articles  of  consumption, 
we  can  postpone  or  wait  for  each  use  or  service  as  it  recurs ; 
or  we  can  dispose  now  of  all  its  expected  future  uses  by  selling 
it  outright.  Obviously  there  is  a  disadvantage  in  waiting^ 
because  the  present  satisfactions  that  we  could  buy  are  more  j 
keenly  appreciated  than  these  future  satisfactions.  In  paying/ 
us  a  capital  sum,  therefore,  the  purchasers  or  actual  consumers 
will  insist  on  a  reward  for  their  forbearance.  We  can  invest 
the  money  in  something  that  can  be  consumed  at  once  ;  they 
must  wait  for  each  recurring  service  or  use  of  the  commodity 
now  in  their  possession.  /As  the  future  changes  into  the  pres- 
ent, each  use  of  the  commodity  will  afford  them  a  definite 
satisfaction  ;  but  at  the  present  moment  the  actual  value  of 
each  anticipated  future  use  is  somewhat  smaller  than  will  be 
the  value  of  that  use  when  realized.  This  difference  or  dis- 
count is  the  reward  for  forbearance,  that  is,  for  postponing 
present  satisfactions. 

Articles  of  consumption,  however,  must  be  replaced.  A 
stock  of  consumption  goods  can  continue  or  increase  only 
through  the  means  of  production  goods.  If  things  are  used 


§  167]  Forbearance.  397 

for  productive  purposes,  their  capital  value  must  be  explained 
in  the  same  way  as  that  of  consumption  goods.  The  person 
who  has  created  a  piece  of  capital  must  be  rewarded  for  his 
waiting.  Instead  of  consuming  everything  now,  he  prefers  to 
put  a  part  of  his  energies  into  producing  something  which 
will  last,  and  will  help  him  in  the  future.  He  postpones  his 
gratifications,  he  waits  for  the  future  rents  or  earnings  of  this 
thing  that  now  has  a  capital  value,  because  it  capitalizes  the 
anticipated  rents  or  earnings.  As  these  future  earnings  become 
with  the  lapse  of  time  present  earnings,  they  acquire  a  greater 
value, — greater  by  the  amount  that  a  present  satisfaction  ex- 
ceeds a  future  satisfaction.  When  a  man  puts  his  capital  into 
a  savings  bank  or  into  a  business  or  into  a  concrete  commodity, 
the  aggregate  of  earnings  or  services  as  they  mature  exceed 
the  present  capitalized  worth  of  those  earnings.  The  capital, 
as  it  is  said  will  earn  (in  the  future)  a  surplus  over  its  present 
(capitalized)  value.  If  he  keeps  the  capital,  this  surplus  will 
accrue  to  him ;  if  he  loans  it,  the  borrower  must  pay  him  the 
surplus  which  will  have  been  earned  by  the  time  that  the 
capital  is  repaid.  If  we  own  a  boat  and  rent  it  out,  it  may 
bring  in  $150  before  it  is  finally  discarded  after  a  dozen  years ; 
but  if  we  sell  it  now  it  may  fetch  only  $80.  The  difference, 
or  $70,  is  the  interest  or  surplus  reward  which  accrues  to  us  if 
we  wait  for  the  future  earnings  to  come  in.  (As  the  future  uses 
or  earnings  ripen  into  present  earnings,  they  acquire  an  enhanced 
value.  1 

To  say,  however,  that  interest  is  the  reward  of  forbearance 
does  not  suffice.  We  must  remember  that  all  price  depends 
on  marginal  utility.  We  are  always  comparing  one  kind  of 
enjoyment  with  another,  and  the  increments  of  satisfaction 
diminish  with  the  supply  until  we  reach  a  certain  point  or 
margin  where  the  increment  of  satisfaction  afforded  by  a  given 
service  or  commodity  is  overtaken  by  that  afforded  by  another. 
When,  therefore,  we  compare  present  with  future  satisfactions, 
we  are  really  comparing  marginal  increments  of  enjoyment. 
Our  present  estimate  of  each  successive  future  use  of  a  com- 


398  Interest.  [§167 

modity  diminishes  as  that  use  recedes  into  the  future ;  but  the 
extent  to  which  we  are  willing  to  refrain  from  present  con- 
sumption depends  on  the  relative  amount  at  our  disposal.  If 
we  have  a  large  quantity  of  a  commodity  or  a  large  sum  of 
money  with  which  to  buy  it,  we  can  consume  only  a  small 
portion  now,  and  may  be  quite  ready  to  lay  by  the  rest  because 
it  does  not  involve  any  perceptible  sacrifice.  With  every 
diminution  in  the  amount  at  our  disposal,  however,  the  greater 
will  be  the  importance  which  we  attach  to  present  satisfactions, 
and  the  more  remote  will  appear  the  advantage  of  saving  for 
the  future.  Finally,  a  point  will  be  reached  where  these  two 
considerations  balance  each  other,  and  where  we  shall  be  on 
the  margin  of  doubt  whether  to  save  or  to  spend.  Beyond 
that  point  we  shall  surely  not  save,  because  we  secure  more 
satisfaction  from  present  enjoyment. 

When,  therefore,  we  say  that  interest  is  the  result  of  forbear- 
ance, we  really  mean  that  interest  is  the  result  of  marginal 
forbearance,  or  forbearance  at  the  margin.  The  disadvantage 
of  waiting,  which  is  the  essence  of  interest,  is  the  disadvantage 
of  waiting  at  the  point  where  we  get  ready  to  substitute  one 
kind  of  enjoyment  for  another.  This  marginal  point  will 
indeed  be  a  different  one  for  the  rich  and  the  poor,  for  the 
spendthrift  and  the  miser,  but  this  difference  will  affect  the  rate 
of  interest  as  little  as  the  relative  wealth  of  the  purchaser 
affects  the  price  of  wheat  on  the  exchange.  The  value  of 
wheat  is  the  expression  of  its  marginal  utility  to  the  wheat- 
using  group ;  the  interest  on  capital  corresponds  to  the  difference 
in  the  marginal  estimates  of  present  and  future  uses  for  the 
whole  capital-using  group.  Value  in  the  market  is  social 
value  (§  74). 

Interest,  then,  is  not  simply  the  discount  between  present  and 
future  enjoyments  in  general.  There  would  indeed  be  no 
capital  if  there  were  no  saving,  but  all  saving  does  not  involve 
a  sacrifice  or  disadvantage.  People  would  save  something 
even  if  there  were  no  interest.  A  prudent  man  knows  that 
he  will  need  something  for  a  rainy  day ;  a  far-sighted  man 


§  i68]  Interest  and  Productivity.  399 

may  even  believe  that  the  future  social  demand  for  a  commod- 
ity or  service  will  grow,  and  he  would  then  save  or  accumulate 
the  particular  capital  even  if  there  was  no  reward  in  the  form  of 
interest.  For  if  he  is  right,  it  will  be  worth  more  to  him  in  the 
future  than  it  is  at  present.  But  when  a  man  saves  or  accumu- 
lates capital,  he  would,  if  there  were  no  interest,  soon  reach  a 
point  where  his  gains  from  accumulation  would  be  overtaken  by 
his  loss  in  foregoing  present  enjoyments  for  future  satisfactions. 
This  would  be  the  margin  or  final  point  where  he  would  stop 
saving  or  capitalizing.  Interest  therefore  is  the  discount 
between  present  and  future  marginal  increments  of  enjoyment  ; 
that  is,  interest  is  the  measure  of  the  marginal  disadvantage 
of  forbearance. 

Moreover,  since  at  this  margin  men  are  constantly  compar- 
ing the  service  of  one  commodity  with  that  of  another,  interest 
is  the  return  for  awaiting  not  simply  the  future  service  of  some 
particular  piece  of  capital,  but  that  of  any  other  piece  of  capi- 
tal which  may  be  substituted  for  it.  In  other  words,  the  rate 
of  interest  depends  on  the  difference  between  the  actual 
estimate  of  the  present  and  that  of  the  future  services  of  the 
whole  mass  of  capital  at  the  margin,  that  is,  of  the  marginal 
increments  of  the  entirety  of  capital. 

168.  Interest  and  Productivity. 

It  is  obvious  that  unless  a  commodity  afforded  some  services 
or  earnings  there  would  be  no_use  in  waiting  and  no  advantage 
in  forbearance.  Instead  of  centring  our  attention  upon  the 
forbearance  we  may  equally  well  turn  our  consideration  to  the 
future  services  which  capital  will  yield.  In  lieu  of  looking  at 
the  problem  from  the  point  of  view  of  waiting  for  the  service, 
we  may  approach  it  from  that  of  the  capital  which  affords 
the  service.  As  soon  as  we  do  this,  we  face  the  problem  of 
productivity. 

Particular  pieces  of  capital  are  undoubtedly  productive.  An 
axe  enables  us  to  secure  a  greater  result  than  if  we  used  our 
hands.  A  machine  utilized  by  a  laborer  produces  more  than 


400  Interest.  [§  168 

the  labor  alone  could  produce.  If  particular  pieces  of  capital 
are  productive,  capital  as  a  whole  must  be  productive.  If  the 
commodity  no  longer  affords  a  service,  it  will  lose  its  value  as 
a  piece  of  capital,  that  is,  it  will  no  longer  be  capital.  Con- 
versely, capital  will  be  accumulated  because  of  the  earnings  to 
be  derived  therefrom.  When  we  speak  of  capital,  we  inevi- 
tably think  of  the  earnings  of  capital. 

Owing  to  the  law  of  diminishing  returns,  there  is  a  limit  to 
the  profitable  use  of  particular  pieces  of  capital.  If  a  given 
force  of  workmen  had  previously  used  only  their  hands,  and  if 
a  machine  is  introduced,  like  a  loom,  the  product  will  be  at 
once  increased.  If  the  single  loom  does  not  occupy  all  the 
time  of  the  workman,  more  will  be  introduced,  until  with  say 
ten  looms  each  workman  is  fully  employed.  The  addition  of 
an  eleventh  loom  will  still  increase  the  product,  but  the  addi- 
tion will  not  be  so  great  as  before  the  point  of  maximum  utili- 
zation had  been  reached,  because  the  workman  cannot  tend 
each  loom  so  carefully.  A  twelfth  and  thirteenth  loom  will 
add  continually  smaller  products,  until  finally  an  additional 
loom  will  add  nothing  at  all.  *  Now,  since  every  loom  is  as  good 
as  the  other,  the  earnings  or  the  productivity  of  each  is  at  any 
given  time  measured  by  that  of  the  last  or  marginal  loom  em- 
ployed. If  there  are  ten  looms,  the  contribution  of  each  is 
equal  to  that  of  the  tenth ;  if  there  are  thirteen,  the  contri- 
bution to  each  is  equal  to  that  of  the  thirteenth.  The 
earnings  of  the  marginal  _loom.  that  is,  its  additional  con- 
tribution to  the  product,  is  its  rent,  and  if  the  looms  are  hired 
from  the  owner,  the  money  rent  paid  to  him  for  each  loom  will 
be  equivalent  to  the  marginal  earnings,  that  is,  the  earnings  or 
contribution  to  the  product  of  the  marginal  loom.  If  the 
entire  capital  of  the  community  consisted  of  looms,  the  annual 
product  of  the  looms  would  be  the  gross  return  of  the  capital 
invested  in  looms ;  and  this  product,  less  the  cost  of  repairing 
and  replacement,  would  be  at  once  the  net  rent  and  the 
interest. 

The  total  capital  of  a  community,  however,  is  composed  of 


§  1 68]  Interest  and  Productivity.  401 

other  things  than  looms.     Capital  as  a  whole  includes  all  the 
concrete  pieces  of  wealth.     When  we  borrow  a  thousand  dol- 
lars, we  secure  the  opportunity  of  embodying  that  sum  in  any 
individual  piece  of  concrete  capital.     That   sum  has  a  value 
because  it  is  productive,  in  the  sense  that  it  can  at  once  be 
incorporated  into  something  that  yields  a  product.     Since  indi- 
viduals are  constantly  competing  for  the  privilege  and  are  substi- 
tuting different  embodiments  of  that  fund  of  capital  according 
to  their  estimate  of  the  returns  to  be  derived,  it  is  clear  that  , 
at  any  moment  the  productivity  of  the  entire  mass  of  capital/ 
in  existence  is  measured  by  that  of  the  particular  piece  or 
capital  at  the  margin  of  employment.      It  may  be  a  loom  or 
anything  else.     Productivity  of  the  fund  or  aggregate  of  capi- 
tal means  marginal  productivity./ 

This  margin  of  employment,  however,  is  not  simply  the 
margin  of  indifference  as  between  various  pieces  or  increments 
of  capital ;  it  is  also  a  margin  of  indifference  as  between  the 
various  productive  factors  in  general.  Owing  to  the  same 
principle  of  diminishing  returns,  the  United  States  Steel  Cor- 
poration must  continually  consider  whether  it  pays  better  to 
add  another  machine  in  a  given  mill  or  to  burn  more  coal  in 
order  to  speed  the  machines  faster ;  whether  it  is  more  advan- 
tageous to  put  additional  capital  into  that  particular  mill  or  into 
the -steamers  which  transport  the  product  to  the  market.  In 
the  same  way  they  must  consider  whether  it  pays  better  to 
crowd  more  machines  into  the  same  mill  or  to  acquire  more 
land  and  build  a  new  mill.  Finally,  they  must  consider  whether 
it  pays  better  to  increase  the  labor  force  for  the  purpose  of 
getting  more  work  out  of  the  same  machines,  or  to  increase 
the  number  of  machines.  Every  practical  business  man  realizes 
that  there  is  such  a  margin  of  indifference,  beyond  which  an 
additional  application  of  capital  will  not  yield  as  great  returns 
as  an  additional  application  of  labor,  or  vice  versA. 

What  is  true  of  the  individual  is  equally  true  of  society. 
The  total  capital  in  a  given  market  is  constantly  competing 
with  the  total  supply  of  other  productive  agents.  The  margin 

26 


402  Interest.  [§  168 

of  employment  which  tells  in  the  determination  of  the  nor- 
mal rate  of  interest  is  a  social  margin.  All  the  individual 
pieces  of  capital  are  reduced  to  terms  of  money,  and  the  fund 
of  capital  in  any  market  is  the  capital  value  of  all  the  single 
pieces  of  capital.  The  marginal  productivity  of  this  fund  of 
capital  is  the  earning  capacity  of  the  increment  embodied  in 
the  particular  piece  of  capital  employed  at  the  margin. 
That  particular  increment  of  capital  will  yield  a  certain 
return,  and  that  return  or  addition  to  the  capital  constitutes 
interest. 

When  we  have  free  competition  and  complete  mobility  of 
capital,  any  increment  can  earn  only  as  much  as  the  marginal 
increment,  for,  since  they  are  interchangeable,  any  increment 
at  a  given  time  may  be  considered  the  last  or  final  one.  In- 
terest is  the  addition  to  itself  which  the  capital  in  a  given 
market  earns  at  the  point  of  marginal  utilization.  Interest,  in 
other  words,  is  the  product  of  the  marginal  increment  of 
capital. 

It  makes,  therefore,  really  no  difference  whether  we  say 
that  interest  is  the  measure  of  marginal  productivity  or  the 
measure  of  marginal  forbearance.  They  are  two  ways  of  stating 
the  same  fact,  just  as  we  know  that  the  value  of  all  things  may 
be  expressed  in  terms  of  marginal  utility  or  of  marginal  sacri- 
fice. When  we  speak  of  the  productivity  of  capital,  we  think 
of  utility ;  when  we  speak  of  forbearance,  we  think  of  sacrifice. 
Interest,  like  all  value,  may  be  explained  in  terms  of  one  or  of 
the  other,  for  marginal  increments  of  utility  and  of  sacrifice 
tend  to  be  equal.  When,  however,  we  say  that  the  marginal 
increment  of  capital  employed  at  any  given  moment  yields  a 
certain  return,  we  must  not  forget  that  in  a  deeper  sense  it  is 
not  the  piece  of  capital  which  creates  the  product  or  interest, 
but  that  it  is  the  product  or  interest  which  is  responsible  for 
the  capital.  Capital  value  is  the  reflex  of  the  value  of  the 
anticipated  services.  Capital  is  capitalized  income. 


§  169]  Course.  403 

169.  Course  of  Interest. 

Since  interest  is  the  measure  of  marginal  productivity  and 
marginal  forbearance,  the  actual  rate  of  interest  depends  on  the 
location  of  the  margin:  Like  every  other  margin,  this  is  a 
result  of  an  equilibrium  or  balancing  of  economic  forces. 

It  is  obvious  that  in  early  stages  of  development  the  margin 
is  high.  There  is  a  great  scarcity  of  capital ;  and  it  assumes 
the  form  chiefly  of  the  rudest  kinds  of  implements  which  cost 
but  little  time  and  labor  to  create.  The  margin  of  indifference 
is  a  high  one,  and  therefore  the  marginal  productivity  of  cap- 
ital, that  is,  the  rate  of  interest,  is  high. 

As  capital  accumulates,  the  margin  recedes.  While  the 
growth  of  capital  augments  prosperity,  the  product  ascribable 
to  each  individual  piece  of  additional  capital  is  smaller  than 
before.  At  the  new  margin  where  men  are  debating  whether 
to  spend  or  to  save,  whether  to  work  for  current  needs  or  to 
work  harder  for  future  needs,  the  same  result  can  be  secured 
only  by  greater  labor.  The  marginal  piece  of  capital,  in  other 
words,  has  a  lower  productivity.  The  rate  of  interest  falls, 
because  the  capital  employed  at  the  margin  produces  less  for 
itself,  that  is,  adds  less  to  itself.  The  addition  to  itself  at  the 
margin  is  the  rate  of  interest. 

In  so  far,  hence,  as  progress  means  the  continual  multipli- 
cation and  improvement  of  capital,  it  implies  a  steady  reduc- 
tion in  the  rate  of  interest.  Capital  develops  not  only  in 
quantity,  but  in  quality.  We  have  not  only  more  pieces  of 
capital,  but  better  ones.  The  clumsy  tools  are  replaced  by 
fine  machines,  the  log  house  gives  way  to  the  sky-scraper,  the 
wheelbarrow  to  the  electric  locomotive.  The  total  product, 
that  is,  the  aggregate  wealth  of  the  community,  augments,  and 
there  is  such  an  increase  in  the  number  of  increments  of  capi- 
tal that  at  the  margin,  where  the  final  increment  of  capital  is 
employed,  the  selling  value  of  its  product  will  be  less  than 
before.  Prosperity  depends  upon  total  product,  but  value 
depends  upon  marginal  product ;  the  marginal  product  of 


404  Interest.  [§  169 

capital  decreases,  while  the  total  product  of  all  the  capital 
increases.  The  rate  of  interest  falls  because  the  margin  of 
employment  falls;  but  as  the  margin  falls,  the  quantity  of 
capital  grows,  its  quality  improves  and  wealth  increases. 

According  to  the  recent  researches  of  Billeter,  the  normal 
rate  of  interest  on  good  security  during  the  period  of  greatest 
prosperity  in  Athens  was  about  1 2  per  cent ;  while  in  Rome 
at  the  close  of  the  republic  it  had  fallen  to  between  4  and  6 
per  cent.  Starting  in  again  during  the  early  middle  ages  at 
a  rate  of  20  per  cent  and  1 5  per  cent,  it  gradually  fell,  until  in 
the  great  financial  centres  of  Holland  toward  the  close  of  the 
eighteenth  century  it  reached  a  rate  of  between  2  per  cent 
and  3  per  cent.  Since  then  the  rate  has  again  risen,  for 
reasons  to  be  mentioned  in  a  moment. 

It  would  be  a  mistake  to  assume  that  the  margin  is  fixed 
simply  by  the  alternative  returns  from  land.  It  is  true  that 
where  land  is  abundant,  and  land  rent  therefore  low,  the  rate 
of  interest  is  high.  It  is  equally  true  that  one  of  the  causes 
responsible  for  the  rise  of  interest  has  been  the  opening  up  of 
vast  stretches  of  cheap  land  in  the  New  World.  As  the  margin 
of  cultivation  moved  outward,  the  same  piece  of  capital 
applied  to  the  land  yielded  larger  results ;  that  is,  the  margin 
of  the  productivity  of  capital  moved  upward,  and  the  rate  of 
interest  moved  with  it.  But  changes  in  the  productivity  of 
land  are  not  the  sole  factor  in  affecting  the  productivity  of,  and 
therefore  the  demand  for,  capital.  If  labor  should  become 
less  costly,  the  margin  would  also  move  up.  Just  as  in  the 
preceding  case  a  unit  of  capital  would  produce  more  when 
applied  to  a  given  quantity  of  less  expensive  land,  so  now  a 
unit  of  capital  would  produce  more  when  used  in  conjunction 
with  a  given  quantity  of  less  expensive  labor.  The  only  differ- 
ence between  the  two  cases  is  that  the  lower  cost  of  land 
would  mean  a  lower  land  rent,  while*  the  lower  cost  of  labor 
might  mean  either  lower  wages  or,  when  lower  cost  is  due  to 
greater  efficiency,  higher  wages.  During  the  past  century,  for 
instance,  one  of  the  reasons  militating  against  a  fall  in  the  rate 


§  iyo]          Tendency  to  a  Minimum.  405 

of  interest  has  been  the  increased  productivity  of  capital  due 
to  the  lower  relative  cost  of  labor,  whether  the  new  capital  has 
been  used  in  Java  with  the  low- wage  peasant,  or  in  America 
with  the  high-wage  factory  hand.  The  consideration  of  wages, 
however,  must  be  deferred  to  the  next  chapter. 

The  location  of  the  margin  may  be  affected  not  only  by 
changes  in  the  relative  productivity  of  other  factors  of  pro- 
duction, but  by  changes  affecting  capital  itself.  Continual 
improvements  in  capital  undoubtedly  increase  general  produc- 
tivity, but  as  qualitative  improvements  in  pieces  of  capital  are 
subject  to  the  law  of  diminishing  returns,  their  introduction  is 
normally  accompanied  by  a  decline  in  the  rate  of  interest.  In 
Japan  as  in  the  Canadian  Northwest  interest  rates  are  rapidly 
falling,  although  fresh  land  is  scarce  in  the  former,  and  abun- 
dant in  the  latter,  country.  In  the  same  way  the  moving  force 
may  come  from  the  side  of  demand  or  forbearance  rather  than 
of  supply  or  productivity.  The  general  state  of  society  may 
affect  the  readiness  to  postpone  present  for  future  gratifica- 
tions. When  the  Filipinos  complain  of  a  scarcity  of  capital, 
they  forget  that  the  social  and  political  conditions  have  been 
such  as  to  discourage  the  sense  of  saving.  The  true  educa- 
tion for  the  Filipino,  as  it  is  for  the  Negro,  is  to  inculcate  such 
habits  of  mind  as  to  augment  the  readiness  to  forego  present 
satisfactions.  Whatever  does  this  lowers  the  margin  and  leads 
to  a  fall  in  the  rate  of  interest. 

170.   Tendency  of  Interest  to  a  Minimum. 

A  gradual  decrease  in  the  rate  of  interest  is  normal  as  well 
as  beneficial  to  the  community.  It  lowers  cost  and  enhances 
prosperity.  It  would,  however,  be  an  error  to  conclude  that 
this  tendency  is  constant,  and  that  the  interest  rate  will  dis- 
appear or  even  reach  a  bare  minimum.  For,  as  the  rate 
approaches  a  certain  low  point,  it  sets  in  motion  forces  to  pre- 
vent any  further  reduction.  This  can  be  approached  from  two 
points  of  view. 

The  first  consideration  is  the  unlimited  potential  capacity  of 


406  Interest.  [§  170 

modern  society  to  utilize  capital.  A  low  interest  rate,  say 
three  or  four  per  cent,  is  possible  .only  in  a  community  amply 
supplied  with  capital.  In  such  a  complex  society  the  demand 
for  a  greater  control  of  the  conveniences  of  life  is  virtually  in- 
satiable, and  individuals  and  government  alike  will  be  deterred 
from  entering  upon  ever  larger  schemes  of  permanent  im- 
provement and  investment  only  by  the  consideration  of  cost. 
If  the  rate  of  interest  should  conceivably  fall  so  low  that  the  cost 
of  capital  might  be  neglected,  it  would  lead  to  a  well-nigh  in- 
calculable multiplication  of  durable  commodities.  Every  city 
would  be  pierced  by  innumerable  subways,  railroads  would  be 
more  common  than  country  paths,  laborers  would  live  in 
palaces  and  all  other  fairy  flights  of  the  imagination  would  be 
realized.  This  very  statement  is  sufficient  to  show  its  absurd- 
ity. Capital  could  be  costless  only  if  the  concrete  pieces"  of 
capital  cost  nothing.  But  we  know  that  while  progress  is  con- 
stantly reducing  the  cost  of  some  things,  the  fall  in  price  en- 
genders a  production  of  new  things,  previously  non-existent. 
As  long  as  human  labor  involves  some  sacrifice  and  human 
demands  are  illimitable,  there  will  always  be  some  things  that 
cost  labor. 

If  individual  durable  things,  however,  cost  something,  capi- 
tal as  a  whole  can  never  become  costless,  like  air  or  water. 
The  reduction  in  the  cost  of  some  forms  of  capital  will  at  a 
certain  point  be  balanced  by  the  rise  in  the  cost  of  new  forms 
of  capital  which  formerly  did  not  exist  and  therefore  had  no 
cost.  As  long  as  invention  keeps  ahead  of  demand,  cost  will 
fall ;  but  with  every  reduction  in  cost  demand  increases,  and 
when  demand  can  no  longer  be  satisfied  by  an  increase  in  the 
supply,  when,  in  other  words,  the  law  of  diminishing  returns  has 
made  its  influence  felt,  any  serious  reduction  in  the  aggregate 
cost  of  capital  is  impossible.  Putting  it  in  another  way,  we 
may  say  that  after  a  certain  point  has  been  reached  any  addi- 
tional decline  in  the  interest  rate  will  mean  a  more  than  pro- 
portionate increase  in  the  demand  for  capital,  and  this  aug- 
mented demand  which  cannot  be  met  by  any  corresponding 


§  170]          Tendency  to  a  Minimum.  407 

decrease  in  cost  will  prevent  any  further  reduction  in  the 
rate.  As  capital  becomes  more  abundant,  its  marginal  pro- 
ductivity in  terms  of  value  will  decrease,  but  the  decrease  itself 
will  be  arrested  at  a  certain  point.  So  far  as  experience  seems 
to  show,  this  point  means  a  rate  of  between  2  per  cent  and 
3  per  cent. 

The  same  result  can  be  reached  by  approaching  the  problem 
from  the  other  side,  that  of  marginal  forbearance.  The  readi- 
ness to  accumulate  capital  depends  on  the  comparison  between 
present  and  future  estimates.  The  accumulations  of  a  very 
rich  man  as  well  as  of  a  very  poor  man  are  apt  to  be  only 
slightly  affected  by  an  unduly  low  rate  of  interest,  —  the  very 
rich  man  because  he  cannot  well  help  accumulating,  and  the 
poor  man  because  he  has  so  narrow  a  margin  for  saving  of  any 
kind.  In  the  case  of  the  ordinary  man,  however,  who  is 
really  responsible  for  the  growth  of  capital,  the  matter  is  dif- 
ferent. It  is  not  utterly  arbitrary  to  assume  that  a  man  in 
moderate  circumstances  will  commonly  be  willing  to  restrict 
his  expenses  and  lay  aside  annually  a  sum  about  equal  to  that 
which  he  expects  to  enjoy  as  income  in  the  future.  The  time 
required  for  accumulating  a  capital  which  will  yield  such  an 
income  will  be,  at  6  per  cent  interest,  12  years ;  at  3  per  cent, 
24  years;  at  2  per  cent,  35  years;  at  i^  per  cent,  47  years; 
at  i  per  cent,  70  years.1  If  the  interest  rate  falls  from  6  per 
cent  to  3  per  cent,  the  reward,  even  if  smaller,  will  still  be 
worth  while,  and  in  order  to  provide  himself  with  an  adequate 
income  the  individual  may  accumulate  larger  capitals  than  before. 
But  if  the  rate  falls  to  i  ^  per  cent  he  will  seek  to  secure  the 
future  income  in  some  other  way  without  accumulating  a  cap- 
ital. Nowadays  he  would  go  to  an  insurance  company  and 
buy  an  annuity,  and  even  if  he  wishes  to  purchase  an  annuity 
to  last  long  enough  to  include  the  life  of  his  children,  the 
advantage  of  an  annuity  which  at  a  high  rate  of  interest  is 
exceedingly  slight  becomes  more  and  more  substantial  as  the 
rate  of  interest  declines.  With  a  change  in  the  above  figures, 

1  Cassel,  The  Nature  and  Necessity  of  Interest,  p.  146. 


408  Interest.  [§171 

the  conclusions  will  of  course  vary ;  but  in  any  event,  taking 
the  practice  of  the  ordinary  man,  it  is  susceptible  of  a 
reasonably  legitimate  calculation  that  the  rate  of  interest  can- 
not fall  much  below  2  per  cent,  because  otherwise  the  desire 
to  accumulate  would  be  effectually  checked.  While  precise  fig- 
ures are  manifestly  impossible,  it  seems  that  the  margin  which 
fixes  the  rate  of  interest  thus  stands  in  a  close  relation  to  the 
length  of  human  life.  If  human  longevity  were  to  increase, 
the  possible  minimum  in  the  rate  of  interest  might  be  far  lower 
than  is  likely  to  be  the  case  under  present  conditions. 

171.  Regulation  of  Interest. 

Interest  therefore,  like  rent,  is  a  natural  phenomenon,  which 
must  exist  wherever  private  property  in  durable  quantities  is 
found.  Yet  until  recent  times  government  has  always  attempted 
to  restrict  the  rate  of  interest. 

At  the  outset,  when  the  function  of  capital  was  not  compre- 
hended, interest  was  considered  a  return  for  the  use  of  money. 
Since  the  chief  function  of  money  was  held  to  be  its  use  as  a 
medium  of  exchange,  any  compensation,  other  than  the  trans- 
fer of  the  thing  exchanged,  was  deemed  unjustifiable.  The 
price  of  the  use  —  the  pretium  usus  —  was  usury,  usura,  and 
wholly  indefensible.  Usury  and  interest  were  synonymous, 
because  the  use  for  which  a  price  was  paid  involved  an  in- 
terval of  time  "  between  "  (interest}  the  loan  and  the  repay- 
ment. Yet  although  seemingly  unjustifiable,  the  exigencies  of 
business  life  compelled  the  borrower  to  make  some  payment  if 
he  desired  to  induce  the  lender  to  part  with  his  property. 
Public  opinion  began  to  recognize  the  legitimacy  of  some 
moderate  return  to  the  lender,  primarily  as  a  compensation 
for  risk.  The  wedge  was  gradually  pushed  further  in,  until 
a  distinction  was  drawn  between  the  legitimate  return,  now 
called  interest,  and  the  illegitimate  surplus  known  as  usury. 
Legislation  no  longer  prohibited  all  interest,  but  only  ex- 
cessive interest.  Yet  the  legal  rate  of  contract  interest  was 
changed  from  time  to  time  as  the  natural  rate  declined. 


§  iyi]  Regulation  of  Interest.  409 

The  development  of  modern  capitalism  and  the  recognition 
of  the  fact  that  interest  is  paid  for  the  use  of  capital  rather  than 
for  that  of  the  money  representing  the  capital,  have  led  during 
the  last  half-century  to  the  final  stage,  —  the  abolition  of  usury 
laws.  The  modern  theory  rests  on  the  conviction  that  free- 
dom of  loans  enures  to  the  interest  of  the  borrower  as  well-  as 
of  the  community.  To  prevent  the  lender  from  securing 
the  market  rate  is  to  curtail  the  offer  of  capital,  to  restrict 
the  process  of  accumulation  and  to  increase  the  price, 
open  or  secret,  which  the  borrower  must  ultimately  pay.  With 
free  competition  and  complete  mobility  of  capital,  which  are 
the  characteristic  features  of  modern  business  life,  the  lender 
will  get  only  what  his  capital  actually  earns ;  the  contract  or  loan 
interest  will  approximate  the  natural  interest.  The  usury  laws 
still  found  in  some  of  the  American  states  are  an  anachronism.1 

It  must,  however,  not  be  forgotten  that  this  defence  of  free- 
dom in  borrowing  rests  on  the  assumption  which  underlies  all 
liberty,  namely,  relative  equality  in  bargaining.  Where  the 
loans  are  for  immediate  consumption  rather  than  for  productive 
purposes,  and  where  even  in  productive  loans  there  is  such  a 
glaring  discrepancy  between  the  lender  and  the  borrower  that 
the  former  is  able  to  take  an  unfair  advantage  of  the  latter,  the 

1  England  abolished  the  usury  law  on  short-time  commercial  paper  in 
1839,  on  all  except  real  estate  loans  in  1850  and  on  all  loans  in  1854. 
The  other  European  countries,  except  France,  followed  during  the  next 
fifteen  years.  In  the  United  States  usury  laws  are  virtually  unknown  in 
fourteen  states  —  in  nine  of  the  Western  states  they  never  existed,  in 
four  of  the  New  England  states  and  in  Louisiana  they  have  been  sub- 
stantially repealed.  In  the  others  usury  is  still  illegal,  with  various  pen- 
alties. In  seven  states  the  lender  is  disqualified  from  collecting  the 
illegal  excess ;  in  nine  the  whole  interest  is  forfeited ;  in  four  both  princi- 
pal and  interest  are  forfeited;  in  three  double  the  interest  is  forfeited  ;  in 
one  three  times  the  interest  is  forfeited.  Most  remarkable  of  all  is  New 
York,  where  the  penalty  includes  not  only  loss  of  principal  and  interest, 
but  also  a  fine  of  $1,000  and  imprisonment  for  six  months.  This,  how- 
ever, was  so  manifestly  absurd,  that  in  1882  call  loans  were  exempted 
from  the  law.  In  practice,  of  course,  all  other  loans  are  equally  exempt. 
Corporations,  moreover,  are  inhibited  from  availing  themselves  of  the 
usury  law  as  a  defence. 


410  Interest.  [§171 

reason  of  the  rule  falls  away  and  some  degree  of  protection 
may  be  needed  for  the  borrower.  This  is  recognized  in  the 
recent  laws  of  both  England  and  Germany,  where  provision  is 
made  for  such  exceptional  cases.1  In  the  overwhelming  ma- 
jority of  instances,  however,  modern  business  loans  rest  upon 
the  equality  of  business  opportunity  and  the  free  competition 
of  capital.  Under  such  conditions  usury  laws  are  futile  and 
worse  than  futile,  because  they  either  tend  to  evasion  or 
become  a  drag  on  industry. 

1  The  English  act  of  1900  permits  the  courts  to  reduce  the  interest  or 
other  charges  if  satisfied  that  the  charges  are  "  excessive  and  that  the 
transaction  is  harsh  or  unconscionable."  The  act  applies  only  to 
"  money-lenders,"  excepting  from  the  definition  pawn-brokers,  bankers, 
friendly,  loan  and  building  societies. 


CHAPTER   XXVI. 
WAGES. 

172.  References. 

J.  B.  Clark,  Distribution  (1899),  chs.  vii,  viii,  xii,  xxi,  and  The 
Dynamics  of  the  Wages  Question  (Am.  Econ.  Assoc.  Publications,  3d  series, 
IV,  1903) ;  F.  A.  Fetter,  Principles  (1904),  ch.  xxiii ;  T.  N.  Carver,  Distri- 
bution (1904),  ch.  iv;  A.  Marshall,  Principles  (1898),  bk.  vi,  chs.  iii-v; 
F.  A.  Walker,  The  Wages  Question  (1876),  part  i,  ch.  viii,  and  part  2; 
H.  R.  Seager,  Introduction  (1904),  ch.  xiii;  N.  G.  Pierson,  Principles 
(1902),  part  i,  ch.  vi ;  A.  T.  Hadley,  Economics  (1896),  ch.  x ;  J.  S.  Nichol- 
son, /Vmar^&r^ 1 893-1901),  bk.  ii,  chs.  x-xii,  bk.  iv,  ch.  vii ;  and  Machinery 
and  Wages  (1892),  ch.  i,  and  Summary;  A.  W.  Flux,  Principles  (1904),  ch. 
viii;  W.  S.  Jevons,  Theory  (1888),  chs.  v,  viii;  W.  Smart,  Studies  in 
Economics  (1895),  cns-  *~iv >  J-  A.  Hobson,  Economics  (1900),  ch.  vii; 
M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch.  v ;  H.  Sidgwick,  Prin- 
ciples (1883),  bk.  i,  ch.  viii;  F.  W.  Taussig,  Wages  and  Capital  (1896); 
J.  Davidson,  The  Bargain  Theory  of  Wages  (1898) ;  H.  M.  Thompson, 
Theory  of  Wages  (1892) ;  S.  and  B.  Webb,  Problems  of  Modern  Industry 
(1898),  ch.  iii. 

173.  Nature  of  Wages. 

Wages  are  the  remuneration  of  labor.  They  are  paid  for 
the  services  of  human  beings,  as  rents  are  paid  for  the  services 
of  things.  When  we  contrast  wages  with  prices,  we  use  the 
latter  term  in  the  sense  of  the  capitalized  value  of  commodities  ; 
but  if  by  price  we  mean  value  in  the  market,  wages  are,  a  price 
just  as  rent  and  interest  are  prices.  The  law  of  wages  must 
be  like  that  of  rent  and  interest,  for  the  law  of  all  price  is  the 
same. 

Wages,  however,  differ  in  some  respects  from  rent  and  in- 
terest. Interest  is  the  price  paid  for  the  use  of  an  aliquot 
part  of  a  homogeneous  fund,  and  the  small  discrepancies  in  the 

411 


412  Wages.  [§  173 

interest  rate  at  any  given  time  and  place  are  due  to  the  element 
of  risk.  'Net  interest  is  always  the  same  in  a  given  market. 
Wages,  however,  vary  with  the  kind  of  labor.  The  wages  of 
the  skilled  workman  are  higher  than  those  of  the  unskilled ; 
the  wages  of  the  foreman  shade  into  the  salary  of  the  manager. 
Interest  is  homogeneous,  wages  are  heterogeneous.  On  the 
other  hand,  wages  differ  from  rents.  Rents  vary  from  zero  to 
prodigious  sums  :  the  rent  of  a  leased  railroad  may  be  millions 
of  dollars,  the  rent  of  a  worn-out  row-boat  may  be  next  to 
nothing.  The  rents  of  some  things  may  approach  the  vanishing 
point  either  because  the  things  themselves  are  from  the  start 
of  extremely  little  use,  or  because  the  originally  valuable 
things  are  now  fit  only  for  the  scrap  heap  or  the  junkman. 
Human  beings,  on  the  other  hand,  must  live.  The  recom- 
pense of  labor  must  be  large  enough  to  enable  the  workman 
at  least  to  exist.  Wages  therefore  cannot  fall  below  a  positive 
minimum  which  is  absent  in  the  case  of  commodities.  More- 
over, while  wages  are  paid  for  mental  as  well  as  for  physical 
work,  the  socially  significant  problem  of  wages  is  that  of  the 
manual  laborers,  and  with  them  the  gradations  in  labor  are 
slight  compared  to  those  in  the  great  mass  of  commodities. 
Hence,  while  the  assertion  of  a  general  rate  of  rents  is  un- 
meaning, we  do  speak  of  a  general  rate  of  wages.  It  is  not  a 
general  rate  in  the  sense  of  a  general  or  single  rate  of  interest. 
But  it  is  general  in  the  sense  that  it  varies  comparatively  little 
as  between  a  substantial  minimum  for  the  bottom  grade  and  a 
not  very  much  greater  return  for  the  higher  grades  of  those 
laborers  whose  numbers  are  of  importance.  Wages  therefore 
in  their  social  significance  occupy  a  position  midway  between 
homogeneous  interest  and  heterogeneous  rents.  In  one  sense 
wages  vary  like  rents ;  in  another  sense  there  is  a  rate  of 
wages  like  a  rate  of  interest. 

There  is  still  another  sense  in  which  we  can  speak  of  a  gen- 
eral rate  of  wages.  When  values  are  measured  in  terms  of 
money,  we  use  the  term  general  level  of  prices.  Wages  as 
well  as  prices  may  be  high  or  low.  This  connection  between 


_§  173]  Nature  of  Wages.  413 

wages  and  money  leads  to  a  distinction  of  some  importance ; 
namely,  between  money  wages  and  real  wages.  Money  wages 
are  actual  wages  paid  in  money;  real  wages  are  the. actual 
commodities  that  the  money  wages  can  buy.  If  prices  of 
food,  clothing  and  shelter  rise  faster  than  the  price  of  labor, 
real  wages  will  fall  although  money  wages  rise.  The  em- 
ployer's interest  is  in  money  wages ;  the  laborer's  interest  is 
in  real  wages.  The  employer  compares  what  he  pays  with 
the  product ;  the  laborer  compares  what  he  receives  with  his 
expenses. 

Wages,  again,  although  they  are  undoubtedly  prices,  may 
yet  be  usefully  contrasted  with  the  prices  of  things.  Labor  is  a 
commodity  in  the  sense  that  everything  which  has  a  price  is  a 
commodity.  Labor,  however,  is  a  peculiar  kind  of  commodity. 
The  chief  peculiarities  are  four  in  number,  (i)  Commodi- 
ties are  produced  for  the  sake  of  the  services  which  they 
render.  The  increased  supply  of  human  beings  is  not  due 
to  any  such  consideration.  Under  slavery,  where  a  man  was 
a  thing,  human  beings  were  kept  for  breeding  purposes ;  but 
in  a  state  of  freedom  this  consideration  disappears.  It  is 
true,  as  stated  above  (§  26),  that  the  poor  often  look  forward 
to  their  children  as  so  many  additional  supports  to  the  family. 
But  he  would  be  rash  indeed  who  would  assert  that  this  is 
the  motive  of  the  increase.  Commodities  are  produced  for 
certain  ends;  human  beings  are  ends  in  themselves.  (2)  A 
commodity  once  in  existence  continues  to  give  its  services 
•  unbidden  ;  a  laborer  may  work  or  not,  as  he  lists.  The  com- 
modity takes  no  holiday  and  does  not  strike.  The  mule  and 
the  slave  respond  to  the  lash ;  harsh  treatment  of  the  work- 
man may  diminish  rather  than  augment  output.  (3)  Labor 
is  perishable,  while  many  commodities  are  durable.  After  the 
lapse  of  a  certain  time  the  laborer  must  sell  his  labor  or  starve. 
Laborers  and  capitalists  need  each  other,  but  under  normal 
conditions  the  need  of  the  laborer  is  more  urgent.  (4)  Finally, 
labor  is  inseparable  from  the  laborer,  while  the  commodity 
may  be  separated  from  its  owner.  Commodities  are  sold 


4H  Wages.  [§  174 

wherever  the  owner  desires ;  labor  can  be  sold  only  where  the 
laborer  is.  The  owner  of  commodities  may  stay  where  he 
likes  and  send  his  commodities  where  he  finds  a  market ;  the 
laborer  must  accompany  his  labor  to  the  market.  The  one 
is  in  this  respect  free,  the  other  unfree. 

It  is  therefore  not  necessary  to  resort  to  obvious  ethical 
considerations  in  order  to  recognize  the  difference  between 
human  beings  and  inanimate  objects.  The  economic  contrast 
is  a  result  of  man's  personality,  but  it  is  none  the  less  an 
economic  contrast.  The  service  of  a  material  good  is  a  com- 
modity, and  the  good  itself  is  wealth ;  the  labor  of  man  is  a 
commodity,  but  man  himself  is  not  wealth.  The  things  exist 
for  the  services  which  they  afford,  but  man  does  not  exist  for 
wealth ;  wealth  exists  for  man.  The  price  of  labor,  like  the 
price  of  everything  else,  is  the -result  of  economic  forces,  and 
of  economic  forces  alone ;  but  labor  is  such  a  peculiar  kind 
of  commodity  that  the  economic  forces  are  present  in  different 
proportions  and  thus  affect  the  result  differently. 

174.  Wages  and  Cost. 

After  these  preliminaries  we  are  prepared  to  attack  the 
problem  of  the  law  of  wages.  The  most  common  statement  is 
that  wages  depend  upon  supply  and  demand.  In  the  sense 
that  all  value  depends  upon  the  equilibrium  between  supply 
and  demand,  this  is  true  enough;  but 'unless  we  analyze  the 
forces  affecting  normal  supply  and  demand,  the  statement  is  of 
little  use.  In  the  way  in  which  it  is  usually  framed,  moreover, 
the  assertion  leads  to  false  implications.  When  the  ordinary 
man  speaks  of  demand  and  supply  in  reference  to  labor,  he 
thinks  only  of  the  market  variations  rather  than  of  the  point 
about  which  the  actual  rates  oscillate.  Demand  and  supply, 
as  commonly  understood,  afford  a  proximate  rather  than  an 
ultimate  explanation.  As  soon,  however,  as  normal  demand 
and  supply  are  meant  we  are  confronted  by  other  causes. 

The  earliest  attempt  to  supply  this  more  ultimate  explana- 
tion was  the  cost,  or  cost  of  production,  theory  of  wages. 


}  i74]  Wages  and  Cost.  415 

Vlarket  value,  it  was  said,  depends  upon  demand  and  supply, 
)ut  in  all  reproducible  commodities  normal  value  is  fixed  by 
:ost  of  production.  Labor  is  a  reproducible  commodity,  and 
herefore  its  value  must  be  fixed  by  its  cost  of  production. 
Fhe  cost  of  production  of  labor,  however,  is  the  cost  of  per- 
)etuating  a  supply  of  laborers.  Since  the  only  restriction  on 
copulation  was  supposed  to  be  the  bare  possibility  of  support- 
ng  life,  it  was  held  that  the  supply  of  laborers  would  increase 
ip  to  this  point  of  the  minimum  of  subsistence  for  each.  The 
•ate  of  wages,  therefore,  always  tends  to  be  at  the  bare 
ninimum  of  subsistence,  and  the  cost  of  production  theory 
)ecomes  equivalent  to  the  minimum  of  subsistence  theory, 
sometimes  this  is  also  called  the  iron  law  or  the  brazen  law  of 
vages,  because  of  the  assumed  rigidity  of  the  principle. 

This  theory  was  defective  in  two  points.  In  the  first  place  in 
ts  identification  of  labor  with  a  simple  reproducible  commodity 
t  neglected  the  possibility  of  such  an  automatic  check  to 
copulation  as  would  in  any  progressive  community  result  in  a 
:ertain  higher  level  below  which  labor  will  not  be  carried  on. 
secondly,  it  committed  the  error,  common  to  all  the  early 
economists,  of  holding  that  price  is  fixed  by  cost  of  production, 
vhereas  we  know  that  the  relation  is  more  indirect.  In  the 
:ace  of  the  constant  rise  of  wages  during  the  nineteenth  century 
:oupled  with  a  still  greater  increase  of  population,  the  mini- 
•num  of  subsistence  theory  of  wages  finally  broke  down. 

A  variation  of  the  same  doctrine  was  the  wages-fund  theory. 
Fhis  rested  upon  the  three  premises,  first,  that  wages  are  paid 
:>ut  of  capital ;  second,  that  the  amount  of  capital  available  at 
my  given  time  for  such  payment  of  wages  is  predetermined 
md  fixed  ;  third,  that  the  greater  the  number  of  laborers,  the 
smaller  the  share  of  each.  The  conclusion  was  that  since 
laborers  can  influence  only  their  own  numbers  and  not  the 
predetermined  amount  of  capital,  all  independent  efforts  to 
improve  their  position  by  collective  action  are  futile :  the 
sole  method  for  the  laborer  to  increase  wages  is  to  keep 
down  population.  Any  interference,  moreover,  on  the  part  of 


4i  6  Wages.  [§175 

government  with  the  profits  of  capital  will  diminish  the  wages 
fund  and  thus  decrease  wages.  As  one  of  the  more  popular 
writers  put  it :  "  Labor  is  a  commodity.  If  men  will  marry 
and  bring  up  children  to  an  overstocked  and  expiring  trade, 
it  is  for  them  to  take  the  consequences.  If  we  stand  between 
the  error  and  its  consequences,  we  stand  between  the  evil  and 
its  cure ;  if  we  intercept  the  penalty,  we  perpetuate  the  sin." 

Further  reflection  showed,  however,  that  each  of  the  three 
premises  of  the  wages-fund  doctrine  was  vulnerable,  (i) 
Wages  are  not  paid  out  of  capital ;  they  are  only  advanced  out 
of  capital.  They  are  paid  out  of  the  product.  Labor,  like 
capital,  earns  its  own  remuneration.  They  may  co-operate  to 
effect  a  certain  result,  but  the  wages  are  not  paid  out  of  the 
capital  in  any  different  sense  than  the  interest  or  profits  are 
paid  out  of  the  labor.  Both  are  paid  out  of  the  joint  product 
which  they  create.  (2)  There  is  no  such  rigidity  in  the  avail- 
able amount  of  capital  as  is  assumed.  The  capital  applied  to 
production  is  as  susceptible  of  increase  as  is  the  labor  force. 
Both  are  at  any  given  moment  elastic  quantities.  Increase 
the  remuneration  of  either,  and  the  supply  will  grow.  (3) 
Finally,  to  affirm  that  the  rate  of  wages  is  a  quotient  to  be 
arrived  at  by  dividing  the  dividend  or  wages  fund  by  the  divisor 
or  number  of  laborers,  and  that  wages  hence  rise  or  fall  merely 
with  the  changes  in  population,  rests  not  only  on  the  error 
of  considering  the  dividend  as  fixed,  but  upon  the  neglect  to 
remember  that  the  laborers  make  a  contribution  to  the  product 
and  thus  increase  the  sum  to  be  divided. 

With  the  breakdown  of  both  the  minimum  of  subsistence 
and  the  wages-fund  theory  of  wages  the  way  was  prepared  for 
the  modern  doctrine. 

175.  Wages  and  Efficiency. 

In  order  to  reach  a  consistent  theory  of  wages  we  must 
revert  to  fundamental  principles.  All  things  possess  value 
because  of  the  services  which  they  render.  The  value  of  all 
production  goods  depends  on  the  value  of  the  consumption 


§  175]  Wages  and  Efficiency.  417 

goods.  If  the  price  of  iron  products  falls,  the  price  of  iron  ore 
will  fall.  Production  goods,  however,  are  composed  not  only 
of  concrete  objects  but  of  labor.  Labor,  therefore,  has  a  value 
because  its  services  or  products  have  a  value.  If  the  labor  is 
misspent,  the  product  is  valueless,  and  in  the  long  run  the 
labor  will  be  equally  so.  Labor  secures  a  remuneration  because 
it  produces  something  for  which  people  are  willing  to  pay. 
In  other  words,  wages  depend  on  productivity. 

The  value  of  labor,  however,  like  the  value  of  all  things,  is 
affected  by  marginal  increments.  If  a  man  applies  his  labor 
to  land  which  is  so  abundant  that  it  can  be  had  for  the  asking, 
there  will  be  no  rent  of  the  land,  and  the  value  of  the  entire 
product  will  consist  of  wages.  By  increasing  the  number  of 
workmen,  the  product  may  be  more  than  proportionately  in- 
creased, because  the  plot  may  be  large  and  several  laborers  in 
co-operation  may  accomplish  so  much  better  results  that  the 
share  of  each  will  be  greater.  After  the  point  of  maximum 
utilization  has  been  reached,  however,  the  law  of  diminishing 
returns  will  assert  itself,  and  each  additional  laborer  will  add 
relatively  less  to  the  product,  until  if  the  process  were  con- 
tinued long  enough  a  new  laborer  would  make  no  addition  at 
all.  The  process  will  never  actually  be  carried  to  this  point, 
since  the  object  of  activity  is  the  attainment  of  some  result ; 
if  there  is  no  result,  the  activity  will  cease.  At  any  given 
time,  however,  there  is  always  a  final  or  marginal  workman 
who  is  making  some  contribution  to  the  product.  If  there  is 
free  competition  and  if  all  the  laborers  do  their  allotted  task 
equally  well,  so  that  there  is  no  choice  between  them,  the 
share  of  the  product  ascribable  to  any  of  the  workmen  must  be 
equal  to  the  additions  made  by  the  last  or  marginal  laborer 
actually  at  work.  Since  the  value  of  the  entire  product  is  here 
due  to  labor,  the  rate  of  wages  is  equal  to  the  product  of  the 
marginal  laborer.  Wages  depend  upon  marginal  productivity. 

If,  instead  of  operating  with  a  given  piece  of  land,  the 
laborer  were  to  utilize  a  given  quantity  of  capital,  the  result 
would  be  the  same.  Suppose  that  the  labor  is  applied  to  a 

27 


4i  8  Wages.  [§175 

given  quantity  of  looms.  The  total  product  here  indeed  is 
not  wholly  due  to  the  labor,  because  the  looms  cost  something, 
whereas  the  land  was  so  plentiful  that  it  cost  nothing.  The 
share  of  the  product  due  to  the  looms,  however,  is  equivalent  to 
the  interest  on  the  capital  invested.  If  the  number  of  looms 
remains  fixed  and  there  are  no  changes  in  the  demand,  each 
additional  workman  will  add  an  increasingly  smaller  increment 
to  the  total  product ;  and  the  share  of  the  product  at  any  given 
time  due  to  the  labor  will,  as  before,  be  equal  to  the  contribu- 
tion made  by  the  workman  that  is  .employed  at  the  margin. 
What  he  earns  sets  the  standard  for  all  the  others. 

In  actual  life,  indeed,  the  quantities  of  land  and  capital  are 
fixed  just  as  little  as  is  the  number  of  laborers.  The  marginal 
employment  of  laborers  will  therefore  depend  not  alone  on  the 
amount  of  labor,  but  on  the  amount  of  the  other  productive 
factors.  For  these  are  all  competing  with  each  other.  At  a 
certain  point  in  the  process  of  increasing  the  number  of 
workmen  on  a  given  plot  of  land  it  will  be  more  profitable  to 
use  more  land  instead  of  more  workmen ;  and  as  the  better 
land  acquires  a  value,  a  part  of  the  product  will  consist  of  land 
rent.  In  the  same  way  at  a  certain  point  it  will  pay  better  to 
use  more  looms,  so  that  an  increasing  part  of  the  product  will 
consist  of  the  rent  of  the  looms  or  of  the  interest  on  the  capi- 
tal invested  in  the  looms.  Since  the  looms  occupy  space,  the 
product  will  be  divided  into  land  rent,  interest  and  wages. 
And  if  there  are  continual  temporary  changes  going  on,  a  part 
of  the  product  will  take  the  shape  of  profits  to  the  entrepreneur. 
All  this,  however,  although  it  may  obscure,  cannot  prevent,  the 
fact  that  there  is  always  a  point  of  marginal  employment  of 
labor,  and  that  at  this  margin  there  is  a  certain  part  of  the 
product  ascribable  to  labor.  The  normal  rate  of  wages,  that 
is,  the  amount  to  which  wages  tend  to  conform  under  conditions 
of  free  competition  and  mobility  of  both  capital  and  labor, 
is  the  amount  of  value  which  a  given  increment  of  labor 
produces  at  the  margin. 


§  1 7 6]  Rate  of  Wages.  419 

176.  Rate  of  Wages. 

It  may  be  claimed  that  the  productivity  of  anything  at  the 
margin  depends  on  relative  scarcity.  Scarcity,  however,  con- 
notes supply,  and  the  supply  of  labor,  like  that  of  other  things, 
depends  on  cost  of  production.  Are  we  not  then,  after  all, 
really  coming  back  to  the  cost  theory  of  wages? 

The  cost  theory,  however,  can  no  longer  be  stated  as  the 
minimum  of  subsistence  theory.  The  cost  of  living  at  any 
given  time  is  affected  by  the  standard  of  life.  With  the  pro- 
gress of  civilization  and  the  alteration  of  human  wants,  the  stand- 
ard changes.  The  standard  of  the  Chinese  coolie  differs 
from  that  of  the  American  workman  ;  the  standard  of  the  farm 
hand  from  that  of  the  factory  operative.  When  the  cost  theory 
of  wages  is  couched  in  terms  of  the  standard  of  life  theory  it 
loses  its  pessimistic  connotation.  For  if  wages  vary  with  the 
standard  of  life,  anything  which  lifts  the  standard  will  raise  the 
rate  of  wages. 

In  reality,  however,  the  standard  of  life  cannot  accomplish 
the  impossible.  The  highest  standard  will  not  prevent  wages 
from  falling  in  the  face  of  a  decrease  in  the  demand  for  the 
product  and  a  decline  in  industrial  prosperity.  If  the  em- 
ployers cannot  sell  their  product  at  a  given  price,  they  must 
lower  cost  or  abandon  the  business.  From  this  point  of  view 
the  cost  of  labor  is  like  the  cost  of  anything  else ;  it  must 
adjust  itself  to  the  price.  As  was  said  by  Longfield  three- 
quarters  of  a  century  ago,  the  wages  of  the  laborer  depend 
upon  the  value  of  his  labor  and  not  upon  his  wants. 

The  standard  of  life  theory  and  the  productivity  theory  may 
thus  be  declared  complementary.  They  are  both  true  in  the 
sense  that  the  cost  and  the  utility  theories  of  value  are  true. 
But  while  marginal  utility  tends  to  equal  marginal  cost,  we 
know  that  the  ultimate  explanation  of  value  is  to  be  found  on 
the  side  of  utility  and  that  marginal  cost  adjusts  itself  to  mar- 
ginal utility.  Cost  seems  to  be  the  cause  of  value,  but  is  in 
reality  a  measure  rather  than  a  cause.  So,  in  the  same  way, 


420  Wages.  [§  177 

marginal  productivity  (that  is,  marginal  efficiency  or  utility) 
is  the  causa  causans  of  the  rate  of  wages,  while  the  standard  of 
life  (or  marginal  cost),  which  seems  to  be  cause,  in  reality 
adjusts  itself  to  the  productivity.  The  rate  of  wages  may 
be  expressed  in  terms  of  either,  but  the  positive  force  is 
productivity. 

The  standard  of  life,  however,  is  of  exceedingly  great  im- 
portance. It  often  serves  as  a  dyke  to  prevent  for  a  time  at 
least  the  inundation  of  the  field.  It  is  here  that  the  contrast 
between  men  and  things  is  apparent.  With  ordinary  com- 
modities, a  new-comer  who  can  produce  the  same  goods  at 
lower  cost  will  reduce  the  price.  With  labor,  if  the  cost,  that 
is,  the  standard  of  life,  has  become  a  customary  one,  the  new- 
comer will  not  be  so  apt  voluntarily  to  submit  to  a  lower  stand- 
ard. To  the  ordinary  producer  low  cost  of  the  product  means 
high  gains ;  to  the  laborer  low  cost  of  the  product,  that  is,  low 
wages,  means  low  gains.  It  is  only  where  the  new-comers  are 
habituated  to  a  lower  standard  and  where  the  exigencies  of  the 
situation  force  them  to  accept  the  smallest  sum  the  employers 
will  give,  that  the  real  difficulty  .arises.  Thus  women's  wages 
are  frequently  lower  than  men's,  not  only  because  in  some  oc- 
cupations women  produce  less  than  men,  but  also  because,  even 
where  the  product  is  the  same,  the  woman's  standard  of  life  is 
lower,  in  that  she  is  generally  not  the  support  of  the  family 
and  is  often  not  entirely  dependent  on  her  earnings.  In  the 
same  way  the  immigrant  receives  lower  wages  than  the  native 
workman,  not  only  because  his  contribution  to  the  product  is 
frequently  less  through  ignorance  or  lack  of  skill,  but  because 
his  standard  of  life  is  so  much  lower  that  he  will  be  willing 
to  work  for  less  —  at  least  until  he  becomes  educated  up  to 
the  new  standard  of  life. 

177.   Course  of  Wages. 

Since  wages  are  fixed  by  the  value  of  the  marginal  incre- 
ment of  labor  employed,  changes  in  the  normal  rate  of  wages 
depend  upon  changes  in  the  location  of  the  margin.  These 


§177]  Course  of  Wages.  421 

changes  may  take  place  on  the  side  of  labor  or  on  that  of  the 
other  factors  of  production. 

Anything  which  tends  to  enhance  the  productivity  of  labor 
in  itself  will  increase  the  product  of  the  marginal  unit  and  thus 
raise  the  rate  of  wages.  Education,  the  development  of  mental 
and  moral  vigor,  energy  and  application  —  in  short,  all  those 
qualities  which  differentiate  advanced  from  low-grade  com- 
munities —  tend  to  raise  wages  because  they  increase  productr- 
So  far  as  governmental  action  or  labor  organizations  succeed 
in  lifting  this  plane  of  efficiency  they  also  contribute  to  the 
rise  of  wages.  From  this  point  of  view  the  standard  of  life 
acquires  an  additional  significance,  because  of  the  reflex  action 
of  the  standard  itself  upon  the  efficiency  of  the  laborer.  The 
better  the  man,  the  more  valuable  his  work.  On  the  other 
hand,  the  margin  may  be  affected  by  changes  in  the  other  fac- 
tors of  production.  For  instance,  when  land  is  relatively 
plentiful  as  compared  to  labor,  the  margin  is  high.  In  all  new 
countries  land  rent  is  small,  population  sparse,  and  the  return 
to  labor  abundant.  In  proportion  as  land  becomes  scarcer  or 
less  fertile,  wages  tend  to  fall  relatively  to  land  rent.  Per 
contra,  when  new  sections  are  opened  by  colonization  or 
immigration,  the  tendency  is  for  rent  to  fall  and  wages  to 
rise.  If  land  were  the  only  other  factor  to  be  considered, 
it  would  be  true  that  land  rent  tends  to  rise  at  the  expense  of 
wages. 

Land,  however,  is  not  the  only  factor.  As  the  supply  of 
capital  becomes  more  copious,  the  joint  product  of  capital  and 
labor  rapidly  increases.  With  the  growth  in  the  supply  of 
capital  the  rate  of  interest  tends  to  fall.  When  the  rate 
becomes  as  low  as  in  modern  industrial  communities,  there  is 
such  a  perpetual  and  prodigious  renewal  and  multiplication  of 
capital  that  the  productivity  of  the  marginal  laborer  will  con- 
stantly augment.  Instead  of  working  with  no  tools  or  poor 
tools,  he  will  have  at  his  disposal  ever  better  implements  and 
finer  machinery.  Yet  these  better  tools  and  finer  machinery 
will  cost  constantly  less.  The  product  will  be  larger,  and  the 


422  Wages.  [§  178 

part  of  the  joint  product  to  be  ascribed  to  capital  will  be  rela- 
tively smaller.  Wages,  in  other  words,  will  tend  to  rise. 

Where  both  these  forces  operate'  simultaneously  the  result 
depends  on  their  reciprocal  influence.  In  early  stages  of  eco- 
nomic development,  as  in  some  of  our  Western  states,  both 
wages  and  interest  fall  while  land  rent  rises.  In  the  older 
and  industrially  progressive  sections,  on  the  other  hand,  the 
increase  of  capital  may  overbalance  the  relative  scarcity  of 
land,  and  although  land  rent  will  rise,  the  total  product  will 
increase  so  much  more  rapidly  that  wages  will  rise  as  well. 
Wages  in  the  great  industrial  establishments  of  New  England 
have  increased  during  the  last  half-century,  despite  the  growth 
of  land  rents.  Capital  tends  to  raise  the  marginal  contribution 
of  the  laborer,  because  it  adds  to  his  efficiency,  that  is,  to  his 
control  of  the  powers  of  nature. 

There  exist  in  all  the  important  countries  ample  statistics  to 
show  the  advance  in  real  wages  since  the  early  stages  of  the 
capitalist  system.  We  shall  content  ourselves  with  reproducing 
in  the  table  on  page  423  the  figures  for  the  United  States  since 
the  civil  war.  These  disclose  the  striking  fact  that  real  wages, 
that  is,  the  amount  of  commodities  that  can  be  bought  with  the 
money  wages,  have  risen  more  than  100  per  cent  in  industry 
and  more  than  70  per  cent  in  agriculture.  In  other  words, 
notwithstanding  the  practical  exhaustion  of  the  free  lands  and 
the  rise  in  land  rents,  wages  have  increased  so  that  the  labor- 
ers enjoy  a  continually  greater  command  over  the  conveniences 
of  life.  There  could  be  no  more  eloquent  testimony  to  the 
power  of  the  modern  industrial  system  to  enhance  the  welfare 
of  mankind.  We  also  add  (opposite  page  422)  a  chart  show- 
ing the  relation  of  wages  to  hours  of  work  in  the  United  States 
as  compared  with  Europe,  since  1890. 

178.   Variations  in  "Wages. 

Actual  wages  differ  from  normal  wages  thus  far  considered 
in  three  respects.  The  variation  may  be  due  to  market  in- 
fluences, to  the  nature  of  the  occupation,  or  to  the  conditions 


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Variations  in  Wages. 


423 


MOVEMENT  OF  NOMINAL  AND  REAL  WAGES,  1866-1903 
(1890  AS  THE  STANDARD  YEAR). 


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Falkner's  Index 
Nos.i 

1884 
1885 

98.5 
97.8 

90.0 
98.2 

99.1 

99-5 

1  866 

68.5 

47-9 

I00.03 

70.0 

1886 

97.8 

98.1 

1867 

73  7 

56.0 

1887 

98.6 

97.8 

.... 

1868 

72-3 

53-9 

— 

1888 

99.2 

96.6 

99-3 

96.7 

1869 

75.2 

52-7 

98.0 

8i.s 

j889 

99-6 

948 

25  Occupations.2 

Bureau  of  Labor,* 

City  Wages. 

519  Occupations. 

.870 

87-3 

68.7 

1890 

1  00.0 

100.0 

I  OO.O 

i  oo.o 

1871 

94-7 

72.2 

... 

1891 

99-7 

98.4 

1872 

97.0 

74-9 

... 

1892 

100.3 

joo.8 

100.7 

101   2 

'873 

93-2 

76.3 

1893 

IOO.2 

98.3 

106.7 

104.7 

1874 

Qf.l 

73-2 

1894 

96.7 

99-4 

97-7 

100-3 

1875 

88.7 

72-5 

90.8 

74-3 

1895 

97-4 

02.  o 

96.5 

IOI.O 

1876 

86.3 

74-4 

1896 

98.5 

05-7 

1877 

88.8 

77.8 

1897 

98.2 

°4-5 

1878 

01.3 

829 

1898 

99.0 

02.7 

107.9 

111.9 

1879 

91.8 

90-5 

838 

82.6 

1899 

IOO.2 

03.1 

113.0 

116.3 

1880 

92.6 

82.8 

... 

1900 

103.1 

04-5 

1881 

95-3 

82.4 

.  .     • 

1901 

104.8 

02.1 

.... 

1882 

96.9 

83-3 

99-7 

85-V 

1902 

1  08.  2 

oo.o 

I3I-7 

I2I.6 

1883 

97-7 

85-9 

1903 

III.  2 

03.2 

1  Unweighted    averages   of    wages    in    21    industries,   from    Senate 
(Aldrich)  Report  on  Wholesale  Prices,  Wages  and  Transportation,  p.  180. 
All  wages  in  this  table  are  on  the  gold  basis,  and  all  real  wages  down  to 
1889  are  based  upon  Falkner's  weighted  index  numbers  of  prices,  from 
the  same  report,  p.  100.     The  meaning  of  the  terms  weighted  and  un- 
weighted are  explained  below  (§  190). 

2  Unweighted  averages  covering  12  important  cities,  from  Bulletin  of 
the  Department  of  Labor,  No.  18,  p.  669. 

3  Weighted  averages  of  monthly  wages,  reduced  to  gold  basis,  com- 
piled from  Bulletin  No.  26,  miscellaneous  series,  United  States  Depart- 
ment of  Agriculture,  p.  15. 

4  Weighted  averages  of  weekly  earnings  from  Bulletin  of  the  Bureau 
of  Labor,  No.  53,  pp.  721-723.     All  real  wages  from  1890  to  1903  based 
upon  index  numbers  of  retail  prices  given  in  this  bulletin, 

This  table  is  taken  from  Adams  and  Sumner,  Labor  Problems  (1905), 
514.  It  is  selected  as,  on  the  whole,  the  most  accurate  and  conservative 
presentation  of  the  facts.  The  authors  give  several  warnings  as  to  the 


424  Wages.  [§  178 

of  equality  as  between  the  giver  and  the  recipient  of  wages 
in  the  same  occupation. 

(1)  Market  variations  need  not  detain  us  long.     Like  all 
market  prices,  wages  in  every-day  life  are  the  result  of  ephem- 
eral changes.     While  of  the  utmost  importance  to  the  prac- 
tical   business    man,    the    market    oscillations    do    not    lend 
themselves  to  any  detailed  analysis.     In  brisk  times,  when  the 
temporary   demand    increases  faster  than  the   supply,  wages 
advance  and  vice  versa.     Farm  hands  secure  higher  pay  at 
harvest  time ;  factory  operatives  must  choose  between  lower 
wages  or  less  work  during  a  period  of  great  temporary  depres- 
sion.    These   facts   are  so   obvious  as  to  need  no   elaborate 
explanation. 

(2)  The  inequalities  may  be  due  to  the  occupations  them- 
selves.    We  do  not  here  indeed  deal  with  market  wages,  but 
the  wages  are  normal  only  within  each  occupation.     They  are 
particular  normal  wages,  not  general   normal  wages.     Some- 
times the  inequality  is  more  ostensible  than  real.     The  sea- 
sonal demand  may  differ.     In  the  wholesale  clothing  trade  the 
two  busy  seasons  are  followed  by  the  slack  months ;  the  brick- 
layer can  ply  his  vocation  only  in  favorable   weather.     The 
rate  of  wages  for  permanent  workmen  must  be  such  as  to 
equalize  these  differences.     The  high  nominal  day  wages  of 
the  bricklayer  may  be  far  lower  real  monthly  wages ;  the  high 
weekly  or  monthly  wages  of  the  clothing  "  operator  "  during 
the  busy  season  may  be  only  moderate  real  yearly  wages. 

Adam  Smith  attempted  to  reduce  the  inequalities  in  wages 

use  of  the  table  :  (i)  In  the  industrial  group,  the  figures  are  the  results 
of  three  distinct  investigations.  The  averages  are  not  absolutely  com- 
parable. But  the  probable  error  is  slight.  (2)  Up  to  1889  tne  compar- 
ison is  with  wholesale  prices,  after  1890  with  retail  prices.  The  effect  of 
this  is  probably  to  exaggerate  the  relative  advance  of  real  wages  for  the 
earlier  period.  (3)  Statistics  of  real  wages  are  really  trustworthy  only  in 
periods  of  normal  prosperity.  In  time  of  depression,  prices  fall  more 
quickly  than  wages,  so  that  real  wages  seem  to  be  increasing  when  in 
reality  there  is  mucli  more  unemployment  and  a  decline  in  the  welfare  of 
the  laborers  as  a  whole.  Thus  in  1896  the  real  wages  seem  to  be  higher 
than  in  1892  or  1902. 


§  178]  Variations  in  Wages.  425 

to  five  causes  :  the  agreeableness  of  the  occupation,  the  con- 
stancy of  employment,  the  ease  of  learning  the  trade,  the  degree 
of  trust  to  be  reposed  in  the  workman,  and  the  probability  of 
success.  In  a  more  general  way,  however,  it  may  be  said 
that  inequality  of  pay  is  due  to  inequality  of  work.  A  watch- 
maker gets  more  than  a  street-sweeper  because  his  contribu- 
tion to  the  product  is  greater.  If  all  units  of  labor  were  at 
least  potentially  equal,  and  if  there  was  complete  mobility,  the 
street-sweepers  would  all  become  watch-makers  and  wages 
would  stand  at  a  level.  Obviously,  however,  the  higher  the* 
degree  of  required  skill,  the  greater  the  relative  scarcity  of 
workmen.  This  scarcity  may  be  due  to  four  causes :  a  defi- 
ciency of  natural  talent,  a  lack  of  opportunity,  the  cost  of 
mastering  the  trade,  and  the  obstacles  in  the  way  of  move- 
ment from  employment  to  employment.  The  differences 
between  occupations  may  thus  be  either  natural  or  artificial; 
in  either  case  the  labor  force  is  at  any  given  time  divided  into 
what  are  in  some  respects  at  least  non-competing  industrial 
groups. 

(3)  Finally,  the  discrepancy  between  normal  and  actual 
wages  may  be  due  to  conditions  of  inequality.  This  may  be 
ascribable  to  the  fact  that  there  is  only  one-sided  competition, 
or  that  the  conditions  of  the  mutual  competition  are  different. 
There  may  be  a  monopoly  on  the  labor  side.  If  any  group  of 
workmen  can  secure  such  a  complete  control  of  the  trade  that 
it  need  fear  no  entrance  of  undesired  members,  it  can  raise  the 
rate  of  wages  considerably  above  the  normal  point.  In  rare 
cases  only  is  this  possible  on  a  large  scale  in  modern  times. 
When  the  workmen  are  not  securely  intrenched  by  legal  priv- 
ilege, as  in  the  later  stages  of  the  mediaeval  guilds,  a  rise  of 
wages  far  above  the  normal  level  in  any  one  occupation  will 
set  in  motion  forces  which  will  ultimately  be  strong  enough  to 
break  down  the  artificial  barriers.  If  the  group  is  unduly  re- 
strictive in  its  membership,  the  pressure  from  the  outside  will 
result  in  the  formation  of  analogous  groups,  anxious  to  partici- 
pate in  the  extra  gains,  and  ready  to  take  over  a  share  of  these 


426  Wages.  [§  178 

gains.  Minor  instances,  however,  of  this  temporary  monopo- 
listic excess  of  wages  are  by  no  means  infrequent. 

On  the  other  hand,  competition  may  be  absent  on  the  side  of 
the  employers.  Capital  monopolies,  however,  have  even  less 
opportunity  of  driving  wages  down  below  the  normal  level 
than  labor  monopolies  have  of  raising  them  above  the  level. 
For  even  though  there  may  be  no  competition  within  the  par- 
ticular industry,  there  will  always  be  the  competition  between 
different  industries  for  a  supply  of  workmen.  The  laborers 
are  not  compelled  to  enter  the  employ  of  the  monopoly,  and 
will  not  do  so  when  the  wages  offered  are  lower  than  in  similar 
occupations.  In  point  of  fact,  capital  monopolies  do  not  pay 
lower  wages.  The  American  workmen  in  their  official  unions, 
as  we  have  seen,  are  not  opposed  to  the  monopolies  and  trusts 
on  the  score  of  low  wages.  The  really  perilous  effects  of  capi- 
tal monopoly  on  wages  is  of  a  more  insidious  kind.  All  mo- 
nopoly means  a  relative  restriction  of  production,  for  the  point 
of  maximum  monopoly  revenue  does  not  necessarily  correspond 
to  that  of  maximum  competitive  output  and  marginal  competi- 
tive cost.  Since  wages  stand  in  such  a  close  relation  to  pro- 
ductivity, a  diminution  of  product  must  finally  diminish  the 
amount  available  for  the  payment  of  wages.  Monopoly  of  in- 
dustry is  at  bottom  as  prejudicial  to  the  wage-earner  as  to  the 
consumer. 

Of  more  importance  in  practical  life  is  the  divergence  of 
actual  from  normal  wages  ascribable  to  inequality  in  the  con- 
ditions of  competition.  As  we  learned  at  the  outset  of  our 
discussion,  the  ability  to  drive  a  bargain  varies,  and  a  unitary 
market  price  can  emerge  only  when  there  are  complete  com- 
petition and  mobility  on  the  side  of  both  buyer  and  seller.  In 
the  labor  contract  the  individual  seller  of  labor  is  in  ordinary 
cases  the  weaker  party.  The  workman  is  both  more  ignorant 
and  more  necessitous.  He  is  more  ignorant  because,  while 
the  employer  knows  both  the  cost  of  labor  and  the  price  of  the 
product,  the  workman  is  unacquainted  with  the  details  of 
the  business  and  can  only  guess  at  his  real  contribution  to  the 


§  179]  Wages  and  Profits.  427 

product.  He  is  more  necessitous  because  he  cannot  afford  to 
wait.  The  machine  may  lie  idle,  and  profits  may  cease  for  a 
time  ;  but  running  expenses  also  cease,  at  least  in  part,  and 
when  the  machine  starts  up,  profits  will  follow.  The  laborer 
may  remain  idle,  but  running  expenses,  that  is,  cost  of  living, 
do  not  cease.  If  the  machine  stops,  it  still  endures ;  if  the 
workman  stops,  he  starves. 

When  therefore  the  individual  laborer  is  left  to  his  own  de- 
vices, he  may  fail  to  secure  his  due  share  of  the  joint  product. 
Advantage  may  be  taken  of  his  ignorance  or  of  his  necessity ; 
and  the  example  that  is  set  by  the  less  scrupulous  employer  is 
not  only  contagious,  but  also  often  imposes  itself  as  a  competi- 
tive condition  upon  others  who  might  naturally  possess  more 
scruples.  The  result  is  a  struggle  between  wages  and  profits 
which  transfers  itself  to  the  arena  of  both  economic  and  politi- 
cal life,  and  which  creates  what  is  known  as  the  labor  problem. 

179.   Wages  and  Profits. 

The  relation  of  wages  to  profits  is  thus  complementary  as 
well  as  antagonistic.  They  are  complementary  in  the  sense  that 
prosperity  may  mean  both  high  profits  and  high  wages.  Profits, 
as  we  have  seen,  are  the  chief  inducement  to  enterprise.  The 
anticipated  gains  to  be  derived  from  fluctuations  in  value 
constitute  the  real  incentive  to  business  activity  and  hence  to 
modern  production.  The  hope  of  profits  leads  to  the  invest- 
ment and  increase  of  capital,  and  to  a  better  co-ordination  of 
the  factors  of  production,  and  thus  under  normal  conditions  to 
an  increase  of  output.  The  increase  of  product  is  apt  indeed 
to  be  followed  by  a  growth  of  population.  When  the  product 
increases  at  a  faster  rate  than  the  available  supply  of  workmen, 
that  is,  as  long  as  the  product  keeps  ahead  of  the  population, 
wage  will  tend  to  rise.  Profits  are  constantly  exhausting 
themselves,  only  to  be  renewed  in  a  fresh  attempt  to  conquer 
nature.  High  profits  are  hence  the  best  hope  of  high  wages, 
because  it  is  chiefly  through  the  existence  of  high  profits  that 
mankind  has  any  assurance  of  that  augmented  output  which 


428  Wages.  [§  179 

is  the  chief  factor  in  raising  the  marginal  contribution  of  labor. 
Profits  and  wages  are  in  this  sense  complementary. 

On  the  other  hand,  the  immediate  division  of  the  product  in 
each  individual  case  and  at  any  given  moment  is  largely  one 
of  relative  power.  The  more  that  is  taken  as  profits  by  any 
single  employer  or  group  of  employers,  the  less  will  be  available 
as  wages ;  the  more  that  is  paid  as  wages,  the  less  will  be  re- 
ceived as  profits.  In  this  sense  wages  and  profits  are  antago- 
nistic. In  good  times  wages  and  profits  both  go  up,  in  bad 
times  wages  and  profits  both  go  down ;  but  at  all  times  both 
employer  and  employees  will  strive  to  secure  the  greatest  pos- 
sible share  of  the  joint  product  for  themselves.  Under  condi- 
tions of  frictionless  competition,  complete  mobility  and  effective 
equality  in  bargaining,  the  share  of  each  will  adjust  itself  to  the 
point  of  relative  contribution  to  the  product ;  under  conditions 
of  actual  life  each  side  may  secure  an  excess  at  the  expense 
of  the  other,  and  with  incidental  injury  to  the  public.  In 
the  great  majority  of  cases  the  excess  goes  to  the  employer. 
How  this  excess  may  be  obviated,  and  this  injury  reduced  to 
the  lowest  proportions,  becomes  therefore  a  matter  of  urgent 
concern. 

The  struggle  of  the  laborer  to  improve  his  condition  has 
assumed  four  principal  forms.  He  has  sought  to  invoke  the 
protection  of  the  law ;  he  has  endeavored  to  strengthen  him- 
self and  his  fellows  by  organization  •  he  has  attempted  to  sub- 
stitute a  new  principle  of  remuneration ;  he  has  striven  on  the 
basis  of  existing  methods  to  effect  a  working  agreement  with 
the  employers.  In  other  words,  the  four  phases  of  the  struggle 
are  labor  legislation,  labor  organization,  profit  sharing  or  co- 
operation, and  arbitration  or  conciliation.  These  will  now 
engage  our  attention. 


CHAPTER   XXVII. 
THE   LABOR   PROBLEM. 

180.  References. 

IN  GENERAL:  Adams  and  Sumner,  Labor  Problems  (-with  excellent 
bibliographies,  1905);  J.  G.  Brooks,  The  Social  Unrest  (1903);  United 
States  Industrial  Commission,  Report  (1901),  V,  XVI,  XVII,  XIX, 
723-956;  P.  de  Rousiers,  Labour  Question  in  Great  Britain  (1896);  G. 
Drage,  Labour  Problem  (1896);  Reports  and  Bulletins  published  by  the 
National  Civic  Federation  (1901-1905)  ;  Reeves,  State  Experiments  in 
Australia  and  New  Zealand  (2  vols.,  1903). 

LABOR  LEGISLATION:  Mrs.  S.  Webb  (ed.),  The  Case  for  the  Factory 
Acts  (1901);  S.  and  B.  Webb,  Problems  of  Modern  Industry  (1898),  ch. 
iv  ;  Hutchins  and  Harrison,  A  History  of  Factory  Legislation  (1903); 
W.  S.  Jevons,  The  State  in  Relation  to  Labor  (1882)  ;  S.  Whittlesey, 
Tendencies  of  Factory  Legislation  (Am.  Acad.  of  Polit.  and  Social  Science, 
Annals,  XX,  1903) ;  A.  F.  Weber,  Labor  Legislation  in  the  United  States, 
in  Exhibit  of  Department  of  Labor  at  the  Louisiana  Purchase  Exposition 
(1904)  ;  Goldmark  and  Sikes,  Child  Labor  Legislation  (Handbook  pub. 
by  the  National  Consumers'  League,  1905)  ;  H.  R.  Seager,  Attitude 
of  American  Courts  to  Restrictive  Labor  Laws  (Pol.  Sci.  Quart.,  XIX, 
1904). 

LABOR  ORGANIZATION  :  S.  and  B.  Webb,  History  of  Trade  Unionism 
(1894)  and  Industrial  Democracy  (2d  ed.,  1904)  ;  W.  Smart,  Distribution 
(1899),  chs.  xx-xxiii ;  J.  Mitchell,  Organized  Labor  (1903)  ;  F.  S.  Hall, 
Sympathetic  Strikes  and  Sympathetic  Lockouts  {Columbia  Studies,  X,  1898); 
G.  G.  Groat,  Trade  Unions  and  the  Law  in  New  York  (Ibid.,  XIX, 

1905)- 

PROFIT  SHARING  AND  CO-OPERATION  :  D.  F.  Schloss,  Methods  of  In- 
dustrial Remuneration  (3d  ed.,  1898)  ;  S.  Taylor,  Profit  Sharing  (1884)  and 
A  Dividend  to  Labor  (1899)  ;  Beatrice  Potter  [Mrs.  Webb],  The  Co-opera- 
tive Movement  in  Great  Britain  (1895)  »  ^-  Jones>  Co-operative  Production 
(1894)  ;  Catherine  Webb,  Industrial  Co-operation  (1904) ;  F.  A.  Walker, 
Political  Economy  (1888),  part  6,  ch.  ii. 

ARBITRATION  AND  CONCILIATION:  H.  Crompton,  Industrial  Concilia- 
tion (1876);  L.  L.  Price,  Industrial  Peace  (1887)  ;  G.  v.  Schulze-Gaver- 
nitz,  Social  Peace  (trans,  by  Wallas,  1893)  >  E.  L.  Shuey,  Factory  People  and 

429 


43°  Labor  Problem.  [§  181 

their  Employers  (1900) ;  N.  P.  Oilman,  Methods  of  Industrial  Peace  (1904) ; 
J.  B.  Clark,  Authoritative  Arbitration  (Pol.  Sci.  Quart.,  XVII,  1902); 
H.  W.  Macrosty,  State  Arbitration  in  Australasia  (Ibid.,  XVIII,  1903). 


181.   Labor  Legislation. 

Legislation  in  behalf  of  the  laborer  has  assumed  three  prin- 
cipal forms,  dealing  respectively  with  the  conditions  of  employ- 
ment, the  conditions  of  remuneration  and  the  results  of 
employment. 

(i)  The  chief  abuses  in  the  conditions  of  employment  first 
disclosed  themselves  in  the  factories.  The  enactments  de- 
signed to  deal  with  these  abuses  are  hence  known  as  factory 
laws.  It  was  not  long,  however,  before  the  provisions  of  the 
law  were  extended  to  other  occupations  than  those  conducted 
in  technical  factories.  None  the  less,  the  old  name  has  per- 
sisted. England,  as  the  original  home  of  the  factory  system, 
led  the  way.  The  act  of  1802  applied  only  to  very  young  ap- 
prentices in  cotton  and  woollen  mills,  that  of  1819  to  all  young 
children  in  cotton  mills.  In  1825  and  1831  the  age  limit  was 
raised ;  in  1833  the  law  was  extended  to  other  textile  industries  ; 
in  1841  and  1844  it  was  applied  to  women  in  mines  and  tex- 
tile factories.  In  1847  and  1850  the  provisions  were  made 
more  rigorous;  in  1864  they  were  made  applicable  to  all  large 
industries,  and  in  1867  to  smaller  workshops,  until  in  1878  a 
general  code  of  factory  legislation  was  enacted.  In  the  rest  of 
Europe  and  America  the  system  came  somewhat  later.  In  the 
United  States  the  movement  began  in  New  England,  spread 
subsequently  to  the  Middle  and  Western  states,  and  is  now 
being  actively  pushed  in  the  South. 

The  earliest  form  of  factory  legislation  was  the  prohibition  of 
child  labor.  Children  of  tender  age  must  be  protected  not 
only  against  the  unprincipled  employer  but  against  the  greedy 
or  necessitous  parent.  The  argument  is  biological  and  social 
as  well  as  economic.  To  permit  child  labor  is  to  stunt  body  and 
mind,  to  breed  ignorance  and  immorality,  to  foster  a  progres- 
sive deterioration  of  the  working  population.  The  claim  that 


§  iSi]  Labor  Legislation.  431 

the  earnings  of  the  children  are  needed  for  the  family  support 
is  dispelled  by  the  well-authenticated  fact  that  when  the  father 
is  the  sole  wage-earner  his  income  tends  to  equal  the  previous 
earnings  of  the  entire  family.  In  advanced  states  like  New 
York  child  labor  is  regulated  by  the  compulsory  school  law 
which  prohibits  employment  of  children  under  14  during  the 
school  term  ;  by  the  factory  law  which  forbids  child  work  under 
14  years,  and  regulates  it  between  the  ages  of  14  and  16  ;  by 
the  mercantile  law  which  extends  substantially  the  same  pro- 
visions to  all  commercial  employments;  and  by  the  street 
trades  law  which  applies  to  youthful  newspaper  vendors.  The 
National  Child  Labor  Committee  formed  in  1904  is  bending 
its  energies  to  securing  the  better  enforcement  of  the  law  in  the 
East  and  the  enactment  of  similar  measures  in  the  rest  of  the 
country. 

The  second  form  of  factory  legislation  is  the  regulation  of  the 
hours  of  labor.  Applied  first  to  children,  it  was  gradually  ex- 
tended to  all  minors,  then  to  women,  and  finally  to  adult  males. 
At  every  stage  in  the  development  it  was  opposed  as  an  in- 
fringement of  "  freedom  of  contract."  In  the  United  States 
at  present  there  is  still  the  greatest  diversity  in  the  laws  and 
their  interpretation;  but  since  the  decision  in  1898  by  the 
Supreme  Court  upholding  the  Utah  law  which  established  the 
eight-hour  day  in  mines  and  smelters,  and  the  Kansas  law, 
there  has  been  a  noticeable  tendency  in  the  direction  of  sus- 
taining the  constitutionality  of  similar  measures.1 

The  third  form  of  factory  legislation  is  the  protection  of  life, 
limb  and  health.  After  the  early  appalling  experience  of  the 
ease  with  which  operatives  were  maimed  and  killed,  government 
intervened  to  require  various  elaborate  precautions  and  safety 
appliances.  These  provisions  are  now  common,  although  not 
uniformly  enforced.  From  protection  of  life  to  that  of  health 

1  This  tendency  has  suffered  what  is  probably  only  a  temporary  set- 
back through  the  decision  of  the  Supreme  Court  in  1905  asserting  by  a 
bare  majority  the  unconstitutionality  of  the  New  York  ten-hour  bake- 
shop  law. 


432  Labor  Problem.  [§  181 

is  only  a  step,  and  in  the  so-called  "  dangerous  trades  "  sanitary 
restrictions  are  now  by  no  means  unusual.  The  most  recent 
development  in  America  is  the  application  of  the  principle 
to  sweat-shops  or  the  so-called  parasitic  trades,  where  as  in 
Massachusetts  and  New  York  a  license  is  now  required  for  the 
manufacture  of  clothing,  artificial  flowers,  and  cigars  in  the 
home.  It  is  an  attempt  to  make  domestic  workshops  amen- 
able to  factory  restrictions. 

(2)  When  we  consider  the  conditions  of  remuneration  rather 
than  of  employment,  we  encounter  two  chief  forms  of  legisla- 
tion. The  one  deals  with  securing  the  payment  of  wages. 
The  principal  abuses  here  are  deferred  payment  of  wages  and 
payment  in  "truck"  or  orders  on  the  company  stores,  often 
known  as  the  "  pluck  me  "  stores.  The  truck  system  has  been 
in  great  measure  abolished  in  Europe  by  legislation  requiring 
the  payment  of  wages  in  cash.  In  the  United  States  it  has 
been  restricted  so  far  as  corporations  are  concerned,  but  the 
effort  to  apply  the  prohibition  to  private  employers  is  still  in 
great  part  rendered  nugatory  by  the  courts  as  a  violation  of 
"  freedom  of  contract." 

While  America  lags  behind  Europe  in  this  respect,  both  con- 
tinents still  shrink  from  adopting  the  second  form  of  wage 
legislation,  recently  enacted  in  Australasia,  namely,  the  mini- 
mum wage  laws.  Beginning  in  Victoria  in  1896  with  certain 
"  sweated  "  industries,  the  plan  has  now  extended  to  most  of  the 
colonies  and  has  been  made  applicable  to  many  trades.  In 
those  occupations  where  the  remuneration  is  deemed  to  be  be- 
low the  level  of  a  "  living  wage,"  a  fixed  minimum  is  established 
either  by  official  bodies  or  by  joint  boards  composed  of  the 
employers  and  employees  in  each  trade.  These  rates  are  then 
compulsory  upon  the  whole  trade.  The  nearest  approach  to 
the  system  in  Europe  and  America  is  the  legislation  fixing  the 
wages  of  public  employees  like  street-cleaners  at  a  definite  sum 
and  requiring  the  payment  of  the  "  prevalent  rate  of  wages  "  in 
all  work  done  by  the  contractors  for  the  government.  Although 
the  Australasian  system  has  on  the  whole  worked  satisfactorily, 


§  i Si]  Labor  Legislation.  433 

there  is  an  obvious  risk  in  such  radical  legislation  in  complicated 
communities  whose  industry  is  exposed  to  the  constant  changes 
of  interstate  and  foreign  competition.  Yet  it  may  well  be  that 
similar  methods  will  ultimately  be  found  necessary  here. 

(3)  We  come,  finally,  to  the  legislation  affecting  the  results  of 
employment.  This,  again,  assumes  two  chief  forms.  The  most 
important  is  that  of  employers'  liability  for  injuries  sustained 
by  the  workmen.  In  the  United  States  this  has  been  limited 
by  the  legal  rules  of  implied  risk  and  common  employment  or 
fellow  servant.  The  first  of  these  is  to  the  effect  that  a  work- 
man on  entering  an  occupation  voluntarily  assumes  the  risks 
connected  therewith.  The  second  is  that  when  the  injury  has 
been  caused  by  an  agent,  the  latter  must  be  regarded  as  a  co- 
servant,  and  the  principal  is  therefore  not  responsible.  Under 
this  system  the  employer  virtually  escapes  all  liability. 

In  Europe  both  these  principles  have  been  discarded.  The 
doctrine  of  implied  risk  has  been  replaced  by  that  of  profes- 
sional or  occupational  risk.  It  is  recognized  that,  apart  from 
wilful  or  contributory  negligence,  the  individual  workman  can- 
not be  held  responsible.  In  entering  the  occupation  he  has  no 
choice.  The  risk  is  not  a  personal  but  a  collective  one  ;  it  be- 
longs to  the  occupation,  and  should  be  a  cost  of  the  business 
in  the  same  sense  as  insurance  against  other  risks  is  a  part  of 
cost.  Secondly,  in  modern  factories  or  large  enterprises  the 
old  common  law  rule  of  fellow  servant,  which  arose  in  the  day 
of  the  guild  and  domestic  systems,  has  lost  all  meaning.  To 
call  a  railway  superintendent  and  a  brakeman  fellow  servants 
because  they  both  receive  a  salary  is  absurd.  The  old  rule  is 
gradually  being  modified  by  statute,  but  no  American  state  has 
yet  successfully  applied  to  all  industries  in  general  the  principle 
of  Workmen's  Compensation  Acts,  which,  like  the  English  law 
of  1897,  frankly  throws  the  responsibility  for  accidents  upon  the 
employer.  The  only  attempt,  that  of  Maryland  in  1902,  has 
recently  (1905)  been  declared  unconstitutional  for  a  minor 
defect. 

Other  countries  of  Europe  as  well  as  Australia  have  gone  con- 

28 


434  Labor  Problem.  [§  182 

siderably  further,  and  have  adopted  the  plan  of  compulsory  in- 
surance of  the  laborer.  Beginning  in  Germany  in  the  eighties, 
the  system  has  spread  rapidly.  It  consists  of  three  features  — 
insurance  against  accidents,  illness  and  old  age  —  the  premiums 
being  paid  in  a  declining  ratio  by  the  employer,  the  govern- 
ment and  the  workman  respectively.  America  is  manifestly 
not  yet  ripe  for  these  methods,  but  with  the  gradual  emergence 
of  the  sense  of  social  solidarity,  the  economic  legitimacy  of 
such  a  system  may  finally  be  acknowledged.  It  is  an  attempt 
to  make  the  community  as  a  whole  bear -what  are  really  the 
social  burdens  of  modern  industry,  with  its  fluctuations,  its 
risks  and  its  uncertainties. 

182.    Labor  Organizations  —  Object  and  Function. 

Side  by  side  with  the  effort  of  the  state  to  help  the  laborers 
to  secure  a  reasonable  equality  has  been  the  endeavor  of  the 
workmen  to  help  themselves  through  associated  action.  In 
fact  the  former  has  been  largely  the  result  of  the  latter.  The 
organizations,  starting  within  each  trade,  became  known  as 
trades-unions  and  gradually  assumed  a  national,  and  in  some 
cases  even  an  international,  form.  Where  action  involving  the 
general  interests  of  all  unions  becomes  desirable,  we  find  them, 
as  in  the  United  States,  combining  to  form  councils  or  central 
labor  unions  in  the  cities,  state  federations  in  the  common- 
wealths, and  finally  national  bodies  like  the  American  Federa- 
tion of  Labor. 

The  justification  of  trades-unions  was  long  disputed.  Under 
the  early  law  they  were  illegal  as  conspiracies.  It  was  not 
until  1824  that  they  were  legitimized  in  England,  and  not 
until  much  later  that  the  free  right  of  association  was  conceded 
elsewhere.  The  recognition  that  is  to-day  almost  universally 
accorded  them  rests  on  the  economic  principle  that  in  the 
modern  labor  contract  the  conditions  of  work  have  become 
collective  or  group  conditions,  and  that  the  bargaining  to  be 
equal  must  be  collective  or  group  bargaining.  The,  individual 
workman  is  nowadays  helpless  against  the  typical  employer. 


§  182]  Labor  Organizations.  435 

In  a  railway  or  a  large  factory  work  is  carried  on  under  broad 
general  rules.  The  laborer  who  forms  one  of  a  group  of  tens, 
of  hundreds  or  of  thousands  of  workmen  cannot  expect  to 
bargain  successfully  as  an  individual.  His  only  hope  lies  in 
association.  Freedom  of  contract  is  illusory  because  of  the  self- 
evident  inequality.  The  trades-union  is  an  attempt  to  restore 
to  the  individual  as  a  member  of  the  group  the  equality  which 
has  been  lost  through  the  transition  from  small-scale  to  large- 
scale  industry.  The  trades-union  is  as  inevitable  a  product  of 
modern  economic  life  as  the  corporation.  The  one  is  an 
association  of  labor,  the  other  an  association  of  capital;  both 
are  attempts  ^tQ^ttain^inclividuaJLprospejity  through^concexted 
efforts. 

There  are  two  aspects  to  every  trades-union,  —  the  militant 
and  the  fraternal.  As  a  fraternal  organization  the  union  seeks 
to  accomplish  some  of  the  ends  of  the  old-time  guild.  It 
insures  the  members  against  accident  or  death,  it  supports 
them  when  ill  or  out  of  work,  it  helps  to  educate  them  by 
meetings  and  lectures.  More  important,  however,  are  the 
militant  functions,  through  which  the  union  seeks  to  promote 
its  industrial  power  and  to  increase  the  earnings  of  its  mem- 
bers. From  this  point  of  view  its  activities  may  be  reduced 
to  two  general  categories,  —  the  attempt  to  standardize  con- 
ditions of  employment  and  the  endeavor  to  restrict  work. 

Under  the  first  head  must  be  put  the  effort  to  secure  a 
standard  rate  of  pay  and  a  normal  working  day.  Sad  experi- 
ence^ has  taught  the  laborer  that  if.  the  average  employer  is 
free  to  make  individual  bargains  with  each  workman  he  will 
tend  to  select  the  exceptional  man  to  set  the  pace,  and  by 
paying  him  only  ordinary  wages,  scale  down  the  remuneration 
or  overtax  the  energies  of  the  average  man,  thus  leading  to 
premature  decay  and  a  real  exploitation.  To  prevent  this 
progressive  deterioration  the  unions  seek  to  secure  a  standard 
rate  of  wages.  It  is  sometimes  objected  that  this  implies 
uniformity  of  payment.  This  is  not  quite  accurate.  Wages" 
are  paid  either  by  the  piece  or  by  time.  In  the  case  of 


436  Labor  Problem.  [§  182 

piece  work  the  more  skilful  workman  will  manifestly  earn 
more.  In  certain  trades  piece  work  is  preferred  because, 
when  new  machinery  is  constantly-  being  introduced  or  old 
machinery  speeded  up,  it  enables  the  workman  to  share  in  the 
advantage  of  the  increased  output.  In  England  the  unions 
advocate  piece  work  in  many  trades ;  in  America  the  prefer- 
ence is  less  marked,  but  is  found  in  occupations  like  those  of 
the  shoe-workers,  the  weavers  and  some  others.  Even  in  the 
case  of  time  work,  however,  which  is  advocated  by  the  great 
mass  of  American  unions,  the  uniformity  that  is  sought  is  that 
of  equal  pay  for  equal  work.  There  is  little  objection  to 
putting  the  more  skilful  men  into  classes  higher  than  the 
standard  ;  but  the  standard  itself  must  not  be  lowered.  The 
effort  is  to  make  the  standard  a  minimum,  not  a  maximum. 

Even  when  the  uniformity  of  pay  seems  to  be  that  of  a  so- 
called  dead  level,  it  must  not  be  forgotten  that  the  unions  are 
here  following  the  tendency  of  all  modern  life.  The  essence 
of  modern  capitalism  is,  as  we  have  seen,  the  standardization 
of  industry.  If  business  enterprise  depends  on  mass  output 
and  uniform  production  in  order  to  improve  the  type,  the 
laborer  must  not  be  blamed  for  pursuing  the  same  end.  At 
bottom  the  method  is  that  of  all  democracy.  Democracy  is 
the  most  difficult  form  of  government  because  its  success 
depends  on  the  high  level  of  the  mass.  The  path  of  progress 
consists  in  pulling  the  mass  up  to  the  plane  of  the  better  man, 
not  in  developing  the  aristocrat  at  the  expense  of  the  mass. 
Trades-unionism,  like  democracy,  seeks  here  to  level  up,  not  to 
level  down. 

The  fixing  of  a  normal  working  day  seems  to  be  in  contrast 
to  the  standard  rate  of  pay,  because  the  former  prescribes  a 
maximum,  the  latter  a  minimum.  In  reality,  however,  there 
is  no  difference.  In  a  factory  all  must  begin  and  stop  work 
at  the  same  time,  because  all  are  dependent  on  the  machine. 
If  overtime  is  permitted,  it  will  not  be  long  before  the  employ- 
ment will  be  limited  to  those  that  are  willing  to  work  overtime  ; 
and  when  that  occurs,  the  pay  per  hour  will  inevitably  be 


§  182]  Labor  Organizations.  437 

reduced.  The  attempt  to  curtail  the  hours  of  work  is  really  an 
attempt  to  raise  the  standard  of  pay.  Experience  has  shown 
that  with  the  introduction  of  machinery  concerted  action  of 
the  men  will  be  able  to  extort  higher  pay  with  shorter  hours. 
According  to  the  varying  conditions  in  different  industries,  the 
normal  working  day  is  now  in  large  parts  of  the  United  States 
as  low  as  ten,  nine  and  even  eight  hours.  The  maximum 
working  day  as  well  as  the  minimum  rate  of  pay  is  the  result 
of  an  effort  to  standardize  conditions  of  employment,  so  that 
the  standard  may  move  up  instead  of  down. 

The  success  of  the  unions  in  standardizing  employment  is 
always  beneficial  to  the  workmen.  Where  the  conditions  are 
such  that  there  is  a  real  economy  in  high  wages,  it  may  go  hand 
in  hand  with  the  ultimate  interests  of  the  employer  and  the 
public  as  well.  When,  however,  we  come  to  the  other  phase 
of  trades-union  activity  —  the  attempt  to  restrict  work  —  the 
matter  is  somewhat  more  complicated. 

This  effort  assumes  three  forms,  — Ihejclaim  of  the  right  to 
a  tradqfjme  limitation  of  apprenticeshipT^ne  restriction  of  out- 
put. In  the  first  place,  not  a  few  of  the  labor  troubles  of  the 
present  have  their  origin  in  trivial  and  unseemly  quarrels  be- 
tween the  unions  themselves  as  to  who  should  do  the  work. 
These  jurisdictional  disputes  are  either  (a}  territorial  disputes, 
due  to  the  entrance  of  a  new  union  into  a  given  territory ;  (b) 
demarcation  disputes,  where  each  union  claims  that  a  particular 
kind  of  work  on  the  fringe  belongs  to  it ;  (c)  organization  dis- 
putes, where  the  increasing  specialization  of  industry  calls  into 
being  a  new  union  which  separates  itself  from  the  old,  and'  (d) 
trade  autonomy  disputes,  due  to  the  fact  that  some  organizations 
are  industrial  unions,  comprising  all  the  workmen  in  a  given  in- 
dustry, while  others  are  trades-unions  including  only  the  work- 
men in  particular  sections  or  trades  within  a  great  industry. 
All  these  jurisdictional  disputes  represent  an  attempt  to  transfer 
the  old  doctrine  of  vested  interests  from  the  domain  of  capital 
to  that  of  labor.  Secondly,  the  unions  often  insist  on  an  unduly 
long  period  of  aprjrenticeship,  and  seek  to  limit  the  number  of 


438 


Labor  Problem.  [§  182 


apprentices,  or  to  admit  new-comers  to  membership  only  on 
the  payment  of  high  fees.  Thirdly,,  they  frequently  object  to 
the  introduction  of^ie^-taa^hinery  or  new  methods,  and  when 
this  objection  is  overruled  they  seek  to  limit  the  amount  of 
work  to  be  done  through  the  ';  go  easy  "  or  '^ca-canny  "  system. 

That  all  these  methods  are  in  one  sense  indefensible  is  clear. 
If  wages  ultimately  depend  upon  product,  any  effort  to  restrict 
product  must  finally  act  as  a  boomerang.  Many  unionists 
believe  that  there  is  a  fixed  amount  of  labor  which  has  to  be 
done  ;  that  if  their  union  does  not  secure  it,  another  will ;  and 
that  if  there  are  fewer  members  of  the  union,  or  if  they  all  work 
less,  or  if  there  are  less  machines,  the  pay  of  each  man  will  be 
higher.  This  "  lump-of-labor "  doctrine  of  the  workman  is 
just  as  fallacious  as  the  old  "  wages-fund  "  theory  of  the  capi- 
talist and  leads  to  equally  erroneous  conclusions. 

From  another  point  of  view,  however,  these  practices  do  not 
appear  so  utterly  reprehensible.  The  jurisdictional  disputes  of 
the  unions  are  sometimes  the  result  of  an  effort  to  prevent  the 
standard  rate  in  the  trade  from  being  whittled  down  through 
the  abandonment  of  a  substantial  part  of  the  work  to  those 
accustomed  to  a  lower  remuneration.  The  effort  to  restrict 
apprentices  is  occasionally  due  to  the  endeavor  to  insure  ade- 
quate preparation  for  the  trade,  or  to  frustrate  the  scaling  down 
of  all  wages  to  the  level  of  the  apprentices.  The  attempt  to 
fix  a  maximum  output  may  be  due  to  the  same  reason  which 
led  to  the  maximum  working-day,  —  the  desire  to  prevent  the 
"bell-wether,"  or  "pace-maker,"  or  "rusher,"  or  "leader" 
from  subtly  reducing  the  standard  of  the  average  workman.  In 
short,  while  restriction  of  work  is  in  itself  indefensible  and  un- 
economic, it  may  in  certain  cases  turn  out  to  be  a  form  of 
standardization  and  thus  not  without  justification.  Whether  it 
is  the  one  or  the  other  can  be  determined  only  after  a  careful 
scrutiny  of  each  individual  case.  The  most  progressive  unions 
are  now  uncompromising  foes  of  restriction,  welcoming  the  in- 
troduction of  new  and  better  methods  and  discouraging  careless 
and  inefficient  work. 


§  183]  Labor  Organizations.  439 

183.  Labor  Organization  —  Methods. 

Such  being  the  objects  of  labor  organization,  a  word  must 
be  added  as  to  the  means  utilized  to  secure  these  ends.  As 
militant  organizations  the  unions  employ  two  chief  methods, 
—  the  strike  and  the  boycott.  The  strike  or  concerted  stop- 
page of  work  depends  for  its  success  upon  the  ability  of  the 
strikers  to  prevent  others  from  taking  their  place.  This  has 
brought  them  into  conflict  with  the  law.  The  right  to  strike 
has  been  only  grudgingly  conceded.  At  first  the  courts  held 
all  strikes  illegal  as  conspiracies,  then  they  assumed  the  exist- 
ence of  malicious  intent,  next  they  endeavored  to  distinguish 
between  various  kinds  of  motives,  especially  in  the  case  of 
"  sympathetic  "  strikes,  and  finally  they  are  now  tending  to  dis- 
card altogether  the  question  of  motive  and  to  uphold  the  right 
to  strike  as  such.  This,  however,  carries  with  it  the  right  of 
picketing.  When  picketing  assumes  the  form  of  peaceable  per- 
suasion to  induce  others  to  refrain  from  working,  it  is  justifiable  ; 
when  it  degenerates  into  forcible  opposition,  disorder  and 
wanton  injury  to  body  or  property,  it  is  clearly  indefensible 
and  is  to  be  sternly  repressed. 

The  history  of  strikes  during  the  past  half-century  has 
accentuated  four  facts,  (i)  The  losses  to  the  strikers  have 
been  much  exaggerated.  The  permanent  gain  from  a  success- 
ful strike  often  outweighs  the  temporary  loss  of  all  strikes, 
including  the  failures.  The  real  injury  is  the  disarrangement 
of  industry  and  its  effect  on  the  consumer.  (2)  With  the 
growth  of  unionism  there  has  been  a  distinct  amelioration 
in  the  conduct  of  strikes.  Formerly  violence  and  bloodshed 
were  common,  now  they  are  rare.  (3)  The  oldest  unions 
approve  of  strikes  only  as  a  last  resort ;  but  when  once  entered 
upon,  the  strike  is  deemed  to  be  distinctly  more  advantageous 
to  the  laborers  than  was  the  case  in  former  decades.  Strikes 
authorized  by  the  central  bodies  are  now  both  more  infrequent 
and  more  successful  than  unauthorized  strikes.  Unionism  has 
been,  on  the  whole,  a  conservative  force.  (4)  The  outcome 


440  Labor  Problem.  [§  183 

of  a  strike  is  largely  dependent  on  the  state  of  public  opinion, 
and  the  strike  itself  is  no  longer  held  to  be  a  matter  of  private 
concern  as  between  the  employer  and  the  workmen.  The 
coal  strike  of  1902  was  won,  and  the  New  York  Subway  strike 
of  1905  was  lost,  almost  entirely  because  the  issues  were  so 
clear  that  the  general  sentiment  favored  the  strikers  in  the  one 
case  and  opposed  them  in  the  other.  The  table  opposite 
page  440  shows  some  results  of  strikes  in  the  United  States 
from  1880  to  1900. 

The  second  practice  of  modern  unionism  is  the  boycott,  or 
attempt  on  the  part  of  the  workmen  to  induce  third  parties  to 
abandon  business  dealings  with  the  employer.  In  its  negative 
aspect  it  takes  the  form  of  the  union  label,  which  guarantees 
to  the  public  that  the  goods  have  been  produced  under  con- 
ditions approved  by  the  union,  or  of  the  white  list  which 
contains  the  names  of  those  firms  especially  recommended 
because  they  adhere  to  union  conditions.  In  its  positive 
aspect  it  assumes  the  form  of  the  blacklist  and  the  boycott 
proper.  The  name  blacklist,  however,  is  generally  applied  to 
the  action  of  the  employer  in  denouncing  some  obnoxious 
workman  ;  while  the  analogous  method  on  the  part  of  the  work- 
man is  termed  the  unfair  list.  The  unfair  list  is  usually  confined 
to  the  mere  publication  of  the  names  of  undesirable  firms  : 
the  boycott  proper  consists  of  more  radical  and  thorough- 
going attempts  to  prevent  business  dealings.  The  negative 
boycott  is  usually  upheld ;  the  positive  boycott  is  declared 
illegal,  although  there  is  a  tendency  in  the  modern  law,  even 
if  as  yet  not  so  pronounced  as  in  the  case  of  strikes,  to  take  a 
more  liberal  view  and  to  make  the  decision  hinge  on  the 
question  of  social  progress. 

The  most  recent  activity  of  American  unionism  culminates 
in  the  question  of  the  open  shop.  Originally  a  closed  shop 
meant  one  objected  to  by  the  union  because  of  a  boycott  or 
strike.  When  the  boycott  or  strike  was  called  off,  the  shop 
was  declared  open.  Now,  however,  the  closed  shop  means 
the  union  shop,  that  is,  the  shop  which  is  closed  to  non-union 


RESULTS  OF  STRIKES  ORDERED  BY  LABOR 
ORGANIZATIONS,  AND  NOT  SO  ORDERED,   1881  TO  1900. 

BY  YEARS. 


YEARS 


PER  CENT  OF  ESTABLISHMENTS  IN  WHICH  STRIKES 
SUCCEEDED,  SUCCEEDED  PARTLY,  AND  FAILED. 


10    20   30   40   50   CO 


80   90   100 


1881 
1882 
1883 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 


ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 

ORDERED 
NOT  ORDERED 

ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 
ORDERED 
NOT  ORDERED 


•  SUCCEEDED,    QSUCCEEDED  PARTLY, 

From  Bulletin  of  U.S.  Bureau  of  Labor,  No.  54  (1904J. 


OFAILEQ. 


§  183]  Methods.  441 

men  ;  the  open  shop  is  open  in  the  sense  that  the  employer 
may  engage  non-unionists.  There  is,  however,  still  much 
confusion  because  of  the  failure  to  distinguish  between  a 
closed  shop  and  a  closed  union.  An  open  union  is  one  which 
will  admit  any  competent  man  into  its  ranks ;  a  closed  union 
is  an  indefensible  monopoly.  No  one  can  uphold  a  closed 
shop  with  a  closed  union ;  the  real  controversy  turns  on  the 
question  of  the  closed  shop  with  an  open  union.  That  is  the 
true  problem  of  the  union  shop. 

In  most  of  the  English  and  in  many  of  the  American  unions 
the  open-shop  question  plays  no  role  at  all.  This  is  generally 
true  (i)  where  the  agreements  are  made  not  with  the  indi- 
vidual employer,  but  with  an  association  of  employers,  whereby 
it  becomes  the  interest  of  each  to  prevent  any  infraction  of  the 
compact  by  his  competitor;  (2)  where  the  agreement  is  made 
not  only  for  the  union  men,  but  for  all  the  workmen,  so  that 
the  employer  can  secure  no  advantage  by  hiring  non-union 
men  at  lower  wages ;  (3)  where  all  grievances  of  whatsoever 
nature  are  left  to  a  board  of  arbitration.  When  any  of  these 
conditions  is  absent,  as  in  the  building  trades  or  the  clothing 
industry,  it  is  difficult  for  an  open-shop  union  to  survive,  and 
the  institution  of  the  closed  shop  often  becomes  a  sine  qua 
non  of  the  existence  of  the  union.  It  is  the  same  consideration 
which  explains  the  fact  that  in  some  cases  the  non-union  man 
is  regarded  with  indifference  and  that  in  others  he  becomes 
a  "  scab  "  or  "  strike  breaker  "  and  is  considered  a  traitor  or 
renegade.  In  such  cases  the  appeal  of  the  employer  to  the 
sacred  rights  of  individual  liberty  falls  on  deaf  ears,  because 
the  workman  feels  that  the  real  liberty  of  his  class  is  a 
result  of  associated  action  and  that  association  here  depends 
on  the  closed  shop.  Whether  it  is  defensible  or  not  can 
therefore  be  decided  only  after  a  careful  consideration  of  the 
particular  conditions.  That  the  unions  sometimes  go  too 
far  is  indubitable ;  that  the  employers'  association  recently 
formed  with  the  slogan  of  "  liberty  and  the  open  shop  "  is 
equally  extreme  is  no  less  indisputable.  The  real  test  in  both 


442  Labor  Problem.  [§  184 

cases  is  this  :  is  the  union  standardizing  rather  than  restricting 
work,  and  is  the  closed  shop  necessary  to  the  perpetuation  of 
the  union? 

184.    Profit  Sharing  and  Co-operation. 

While  wages  constitute  the  ordinary  method  of  recompense 
to  the  laborer,  there  are  two  other  possible  systems  of  industrial 
remuneration.  The  one  known  as  co-operation  rests  on  the 
elimination  of  the  capitalist  as  distinct  From  the  laborer ;  the 
other,  which  retains  the  capitalist  but  involves  the  participation 
of  the  laborer  in  the  outcome  of  the  enterprise,  is  popularly, 
although  inaccurately,  called  profit  sharing. 

We  say  inaccurately,  because  the  method  of  participation  is 
found  in  three  forms,  —  as  a  substitute  for  the  wages  system,  as 
an  adjunct  to  the  wages  system  and  as  a  modification  of  the 
wages  system.  The  first  is  technically  called  product  sharing, 
the  second  is  known  as  gain  sharing,  while  the  third  is  the  real 
profit  sharing  or  industrial  partnership. 

(i)  The  principal  example  of  product  sharing  is  seen  in 
farming  and  is  known  as  the  metayer  method  or  share  system. 
The  one  party  supplies  the  land  and  occasionally  additional  cap- 
ital, the  other  furnishes  the  labor ;  and  the  product  is  divided. 
We  call  it  a  substitute  for  the  wages  system,  because  the  remu- 
neration of  the  tenant  is  not  a  stipulated  wage  but  is  contingent 
on  the  produce.  Outside  of  agriculture,  the  chief  instance  is 
that  of  the  fishing  industry.  In  the  Gloucester  fisheries,  for 
instance,  when  the  capitalist  provides  the  vessel,  food  and  gear- 
ing, the  "  catch  "  after  deducting  the  "  trip  charges  "  (z.  e.  the 
cost  of  the  ice,  barrels  and  water)  is  divided  equally  between 
the  ship-owner  and  the  crew.  This  is  "  sharing  on  halves  "  or 
the  "  half  lay."  When  the  crew  furnishes  the  gear  and  provisions 
as  well,  they  get  three  quarters  of  the  catch,  and  the  system  is 
called  "sharing  on  the  quarter,"  or  the  "quarter  lay."  Some- 
times the  "  fifth  lay  "  is  found.  In  seine  fishing  all  of  the  crew 
share  equally ;  in  other  cases  the  share  of  each  is  apportioned 
according  to  his  catch.  The^fishermen  prefer  this  to  fixed  wages, 


§  184]     Profit  Sharing  and  Co-operation.     443 

because  of  the  intimate  relation  of  reward  and  effort.  When 
the  fish  are  sighted,  the  most  unremitting  energy  is  neces- 
sary, and  the  men  are  unwilling  to  expose  their  rate  of  pay  to 
the  hazard  of  the  lazy  or  inefficient  wage-earner.  The  capi- 
talist also  favors  the  system,  because  it  augments  his  profits. 
Another  example  of  product  sharing  is  the  system  of  "  tribute  " 
still  found  in  the  Cornish  mines,  where  each  "  pitch  "  is  let 
out  to  that  group  of  miners  who  agree  to  work  the  ground 
for  the  lowest  sums  per  pound  on  the  agreed  values  of  the  ore. 
In  all  such  cases  of  product  sharing  the  earnings  of  the  laborers 
depend  entirely  on  the  results  of  their  owji_ejj(£rj;s,  not  on  the 
profits  of  the  capitalist.  Where  the  value  of  the  product  is 
dependent  on  the  skill  of  the  entrepreneur,  as  in  ordinary  in- 
dustry, product  sharing  is  inapplicable. 

(2)  The  next  form  of  participation  recognizes  the  existence 
of  the  wage-earner,  but  awards  him  an  added  compensation  as 
an  incentive  to  better  work.    This  also  is  really  not  profit  shar- 
ing, because  the  extra  sum  is  independent  of  actual  profits  and 
must  be  paid  whether  profits  accrue  or  not.     It  is  called  "  gain 
sharing  "  because  both  employer  and  wage- earner  share  in  the 
increased  gains  that  are  presumed  to  ensue.     Sometimes  it  is 
called  the  system  of  the  "  progressive  wage,"  or  the  "  premium 
payment,"  or  the  "bonus  plan,"  or,  as  in  England,  the  "refer- 
ence rate  "  or  "  good  fellowship  "  system.    While  a  few  such  ex- 
periments have  met  with  success,  they  have  not  on  the  whole 
commended  themselves  to  the  American  workman.     For  since 
the  bonus  plan  is  based  upon  a  minimum  wage  with  a  premium 
in  certain  cases,  the  average  unionist  fears  that  what  may  be 
gained  by  some  as  a  bonus  will  be  more  than  lost  by  a  reduc- 
tion of  the  minimum.     He  prefers  to  raise  the  standard   rate 
for  all,  rather  than  to  increase  the  premium  for  some. 

(3)  The   final  plan  of  participation  leaves  untouched  the 
rate  of  wages,  but  modifies  the  labor  contract  by  granting  to  the 
workman  some  participation  in  the  actual  profits  of  the  business. 
The  laborer  here  receives  not  only  wages  but  profits,  and  the 
system  is  hence  properly  called  profit  sharing.    The  division  can 


444  Labor  Problem.  [§  184 

be  accomplished  either  by  an  annual  cash  dividend,  or  by  a  de- 
ferred participation  in  some  provident  fund  or  annuity,  or  by 
the  distribution  of  shares  in  the  stock  of  the  corporation.  The 
objects  of  such  a  system  are  in  the  highest  degree  commend- 
able, both  as  leading  to  increased  efficiency  and  as  conducing 
to  industrial  peace.  But  here  again  experience,  especially  in 
America,  has  shown  that  the  system  possesses  only  a  limited 
efficacy.  The  difficulties  are  fourfold  :  (a)  it  requires  a  pecul- 
iarly broad-minded  employer;  (<£)  it  presupposes  a  set  of 
workmen  who  are  at  once  so  shiftless  that  they  are  not  doing 
their  whole  duty  and  so  intelligent  that  they  realize  the  ad- 
vantages of  the  inducement  to  more  strenuous  work ;  (c)  it 
assumes  the  existence  of  profits,  whereas  the  majority  of  busi- 
ness enterprises  incur  losses  ;  (d)  it  complicates  the  wage  con- 
tract by  introducing  another  possible  element  of  dispute  in  the 
ascertainment  and  adjustment  of  profits. 

While  all  these  forms  of  participation  rest  on  the  continued 
existence  of  the  capitalist,  the  system  of  industrial  co-operation 
attempts  to  eliminate  the  capitalist  by  uniting  in  the  same  in- 
dividual the  functions  of  laborer,  capitalist  and  entrepreneur. 
In  communities  like  England,  where  large  department  stores 
are  unknown,  distributive  co-operation  or  so-called  co-opera- 
tive stores  may  be  of  some  advantage  to  the  consumer.  In 
countries  like  Germany  or  Italy,  where  credit  facilities  are  back- 
ward and  where  there  is  a  leisure  class  ready  to  devote  itself 
to  the  public  good,  co-operative  banks,  especially  in  agricul- 
tural districts,  may  achieve  some  measure  of  success.  In 
special  cases  a  system  of  co-operative  credit,  like  the  Building 
and  Loan  Associations  of  the  United  States,  may  subserve  a 
useful  purpose.  But  as  an  attempt  to  replace  the  wages  sys- 
tem or  as  a  general  scheme  of  social  regeneration,  productive 
co-operation  has  been  attended  with  insignificant  results  else- 
where and  with  almost  complete  failure  in  the  United  States. 
The  reasons  that  usually  militate  against  success  are  fivefold  : 
(i)  the  lack  of  adequate  initial  capital;  (2)  the  scarcity  of 
organizing  ability  ;  (3)  the  unreadiness  of  the  average  member 


§  185]        Arbitration  and  Conciliation.          445 

to  pay  a  salary  sufficient  to  retain  the  exceptional  manager ; 
(4)  the  mutual  distrust  and  the  absence  of  the  true  co-opera- 
tive spirit;  (5)  the  danger,  in  case  of  success,  of  conversion 
into  the  customary  profit- making  corporation.  With  human 
nature  as  it  still  is  found  in  the  ordinary  man,  co-operation  is 
even  less  than  profit  sharing  a  social  panacea  or  an  immedi- 
ately practicable  means  of  escape  from  modern  industrial  evils. 

185.    Arbitration  and  Conciliation. 

The  economist  who  is  to  be  of  any  service  to  the  statesman 
must  therefore  recognize  human  nature  as  he  finds  it.  The 
avenue  to  industrial  peace  must  be  sought  on  the  basis  of 
existing  industrial  methods.  While  the  enthusiastic  idealists 
have  been  pursuing  the  will-of-the-wisp  of  socialism  and 
co-operation,  the  long-headed  practical  men  have  elaborated 
working  schemes  of  slow  and  steady  progress.  ( These  rest  on 
the  frank  recognition  by  botbLpaxties  of  the  utility  of  collective 
or  group  bargammg^J — 

Labor"  disputes  may  be  adjusted  before  or  after  the  differ- 
ences have  reached  a  climax.  If  a  strike  or  lockout  has  been 
declared,  it  is  difficult  to  allay  the  feelings  of  excitement  or 
resentment.  In  industry  as  in  politics  it  is  harder  to  restore 
peace  than  to  preserve  it.  •  This  is,  however,  a  lesson  that  is 
learned  with  difficulty.  In  early  communities  peace  (pax} 
is  the  short-lived  compact  to  cease  from  normal  hostility ;  in 
civilized  nations  the  normal  state  of  peace  rests  on  mutual 
regard  and  readiness  to  make  mutual  concessions.  The  going 
about  witH  a  chip  "on  the  shoulder  or  the  conviction  that  the 
"divine  right "  is  all  on  one  side  is  as  disastrous  in  industry  as 
in  politics. 

In  the  early  stages  of  the  factory  system  the  employer 
refused  to  recognize  any  but  the  individual  workman ;  in  the 
next  stage  he  was  willing  to  deal  with  representatives  of  his 
own  working  force ;  at  present  he  often  concedes  the  wisdom 
of  transacting  business  with  the  union  as  a  whole.  At  first  the 
workman  granted  the  employer  short  shrift  and  strikes  were 


446  Labor  Problem.  [§  185 

bitter  and  violent ;  as  the  unions  became  more  powerful  they 
were  sobered  by  responsibility ;  and  now  in  many  cases  their 
chief  function  consists  in  averting  strikes  and  adjusting  dis- 
putes. In  industry  as  in  politics  war  is  still  a  last  resort,  but 
in  those  occupations  where  strikes  have  become  the  exception 
rather  than  the  rule,  the  result  is  due  chiefly  to  the  elaboration 
of  the  so-called  trade  agreement.  The  system  of  conciliation 
is  one  of  joint  conference  ;  and  it  succeeds  best  where  not 
only  the  employees  but  the  employers  are  organized.  The 
employers'  associations,  like  the  trades-unions,  are,  especially  in 
their  early  years,  often  intolerant,  vindictive  and  short-sighted. 
But  experience  happily  shows  that  the  mere  habit  of  confer- 
ence between  representatives  of  both  parties  tends  to  dispel 
distrust,  to  allay  animosity  and  to  engender  those  feelings  of 
mutual  respect  which  are  the  surest  guarantee  of  peace.  In 
the  United  States,  which  began  to  tread  the  path  of  trade 
agreements  at  a  somewhat  later  date  than  England,  the  inde- 
pendent movement  within  the  industries  themselves  has  been 
powerfully  strengthened  by  the  National  Civic  Federation. 

If  the  dispute  has  come  to  a  head,  the  attempt  at  adjudi- 
cation  is  commonly  called  arbitration.  The  usage,  however,  Ts 
not  uniform,  for  in  many  cases  the  arbiter  or  the  board  of  arbi- 
tration succeeds  in  compounding  the  difficulties  before  they 
reach  an  acute  stage.  In  the  absence  of  an  effective  machinery 
within  the  trade,  government  often  steps  in.  When  it  simply 
tenders  its  good  offices  through  a  system  of  voluntary  arbitra- 
tion, as  in  many  of  the  American  states,  its  success  is  not 
conspicuous.  When  it  endeavors  to  force  the  contestants  to 
come  to  terms,  as  in  the  Australian  systems  of  compulsory 
arbitration,  the  danger  is  that  an  authoritative  arbitrament 
may  rob  the  one  or  the  other  party  of  the  freedom  to  develop 
a  cherished  ideal  that  may  be  necessary  to  its  own  successful 
growth.  Yet  here  again  the  interests  of  the  part  must  be 
subordinated  to  those  of  the  whole,  and  the  final  test  must  be 
the  welfare  of  the  community.  Where  labor  disputes  and 
strikes  result  in  a  wanton  and  widespread  social  injury,  as 


§  185]       Arbitration  and  Conciliation.          447 

in  the  Chicago  strike  of  1894,  the  coal  strike  of  1902,  the 
Colorado  strike  of  1904  or  the  numerous  "tie-ups"  which 
cripple  transportation  and  disrupt  industry  on  a  large  scale, 
the  public  will  sooner  or  later  insist  on  some  form  of  settle- 
ment. Voluntary  conciliation  through  trade  agreement  is 
the  method  best  suited  to  the  temper  and  tradition  of  the 
American  people,  and  is  fortunately  making  rapid  progress. 
But  no  amount  of  reliance  on  the  "  sacred  right  of  free  con- 
tract "  will  in  the  long  run  prevent  society  from  asserting  its 
paramount  claims  to  the  maintenance  of  industrial  peace. 
No  community  will  permanently  brook  opposition  to  these 
plain  dictates  of  self-preservation  and  social  progress. 


Book  IV. 
Value  and  Exchange. 

CHAPTER   XXVIII. 
MONEY. 

186.  References. 

W.  S.  Jevons,  Money  (1879),  chs.  i— xvi,  xxv-xxvi,  and  Investigations  in 
Currency  and  Finance  (1884),  chs.  ii-iv,  ix-xiii ;  J.  S.  Mill,  Principles, 
bk.  iii,  chs.  vii-x;  M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch.  ii ; 
N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  vii,  §§  6-8  and  part  2,  ch.  i  ; 
J.  S.  Nicholson,  Principles  (1901),  bk.  iii,  chs.  xi-xiv ;  C.  M.  Walsh 
Measurement  of  Exchange  Value  (1901),  chs.  iii,  vi-xii ;  D.  Kinley, 
Money  (1904) ;  H.  White,  Money  and  Banking  (1902) ;  L.  L.  Price 
and  its  Relation  to  Prices  (1896);  W.  Ridgeway.  The  Origin  of  Metallic 
Currency  (1892);  W.  A.  Shaw,  The  History  of  th/*  Currency  (1896) 
Major  Leonard  Darwin,  Bimetallism  (1898) ;  J.  L.  Laughlin,  The  Prin- 
ciples of  Money  (1903);  severely  criticised  by  J.  F.  Johnson,  A  ATew 
Theory  of  Prices  (Pol.  Sci.  Quart.,  XVIII,  1903),  and  A.  C.  Whitaker,  The 
Ricardian  Theory  of  Gold  Movements  and  Profes  •;-.>>-  Laughlin 's  Views  on 
Money  (Quart.  Jour.  Econ.,  XVIII,  1904) ;  T.  N.  Carver,  The  Value  of  the 
Money  Unit  (Ibid.,  XI,  1897) ;  brief  historical  summaries  of  the  currency 
question  in  the  United  States  in  D.  R.  Dewey,  Financial  History  of  the 
United  States  (American  Citizen  Series,  1903),  passim;  C.  Rozenraad,  The 
International  Money  Market  (Jour.  Stat.  Soc.,  LXIII,  1900);  I.  Fisher, 
Appreciation  and  Interest  (Am.  Econ.  Assoc.  Publications,  XI,  1896);  T. 
Straker,  The  Money  Market  (1904);  M.  L.  Muhleman,  Monetary  Systems 
of  the  World  (1896);  United  States  Commission  on  International  Ex- 
change, Report  on  the  Introduction  of  the  Gold  Exchange  Standard  into 
China,  the  Philippine  Islands,  Panama  and  other  Silver-using  Countries 
and  the  Stability  of  Exchange  (1904). 

INDEX  NUMBERS.     The  London  Economist,  March,  1864,  with  Annual 
Supplements;  R.  H.  Inglis-Pal grave,  Memorandum  to  the  Commission  on 

448 


§  187]  Functions  of  Money.  449, 

the  Depression  of  Trade  (1886);  A.  Sauerbeck,  in  Journal  Statistical 
Society  (XLIX,  1896,  LVI,  1893,  and  following  years)  ;  A.  Soetbeer, 
Materialien ,  etc.,  translated  in  Bimetallism  in  Europe  (U.  S.  Exec.  Doc. 
50  Cong.,  i  Sess.,  No.  34,  1887)  and  continued  to  date  in  Jahrbucher  fur 
Nat.  Oekonomie  (1892) ;  R.  P.  Falkner,  in  United  States  Senate  (Aldrich) 
Report  on  Wholesale  Prices,  I  (1893),  continued  to  1899  in  Bulletin  of  the 
Department  of  Labor,  No.  27  (1900)  ;  J.  R.  Commons  in  Quarterly 
Bulletin  of  the  Bureau  of  Economic  Research,  Nos.  I  and  2  (1900,  all 
published,  with  many  tables,  charts,  etc.)  ;  Dun's  Review,  Jan.  12,  1901, 
and  monthly  thereafter  ;  Bulletin  of  the  Department  [now  Bureau]  of 
Labor,  No.  39  (1902),  No.  45  (1903),  Nos.  51  and  54  (1904)  and  No.  57 
(1905)  ;  F.  Y.  Edgeworth,  Memoranda  on  the  Best  Methods  of  Ascertain- 
ing and  Measuring  Variations  in  the  Value  of  the  Monetary  Standard 
(British  Association  Report  1887-1889)  ;  W.  S.  Jevons,  Investigations  in 
Currency  and  Finance  (1884),  ch.  iii ;  A.  L.  Bowley,  Statistics  (1901),  ch. 
ix ;  C.  M.  Walsh,  The  fundamental  Problem  in  Monetary  Science  (1903). 

187.   Functions  of  Money. 

The  fundamental  uses  of  money  are  to  serve  as  a  medium  of 
exchange  and  to  act  as  a  measure  of  value.  Which  of  these 
was  the  earlier  is  uncertain  as  well  as  unimportant.  As  soon 
as  the  difficulties  of  an  extensive  barter  disclosed  themselves, 
the  employment  of  a  commodity  for  the  one  purpose  implied  its 
use  for  the  other.  Value  in  business  life  is  exchange  value ; 
when  we  express  exchange  values  of  all  other  commodities  in 
terms  of  one,  we  do  so  with  the  implication  that  they  are 
continually  being  exchanged  for  it,  and  when  they  are  so 
exchanged,  their  relative  value  is  necessarily  measured  by  it. 
Sometimes  money  is  called  the  standard  or  denominator  of 
value  rather  than  the  measure  of  value.  This  is,  however, 
no  real  distinction,  because  a  standard  is  of  use  primarily 
for  measuring.  In  saying  that  money  expresses  the  value  of 
commodities  in  general,  or  that  these  values  are  reduced  to 
a  common  denominator,  we  virtually  affirm  that  money  meas- 
ures their  value. 

The  secondary  functions  of  money  are  three  in  number : 
(i)  Money  is  a  standard  of  deferred  payments.  If  we  lend 
something  for  a  term  of  years,  it  is  important  that  what  is 
repaid  by  the  borrower  should  leave  us  as  far  as  possible  in 

29 


45° 


Money. 


[§  187 


the  same  relative  situation  as  before.  (2)  Money  is  a  store  of 
value.  If  we  wish  to  lay  by  a  fund  of  wealth,  it  is  important 
that  when  we  want  it  again  we  shall  be  able  to  find  it  intact. 
Any  durable  commodity  would  perform  this  function  as  well, 
but  in  the  case  of  money  we  have  greater  assurance  that  its 
value  will  be  stable.  (3)  Especially  in  modern  times  money  is 
used  as  a  reserve  for  credit  operations.  A  large  proportion 
of  money  must  be  kept  seemingly  idle,  when  it  really  serves  as 
a  basis  for  credit  transactions.  This  will  be  explained  in  the 
next  chapter,  but  the  table  appended  herewith  will  show  at  a 
glance  what  a  large  proportion  of  the  coin  actually  existing  in 
various  countries  is  kept  in  reserve  either  by  the  banks  or  by 
the  government. 

APPROXIMATE   STOCKS   OF   COIN   IN   VARIOUS 
COUNTRIES   IN    1903.! 


GOLD. 

SILVER. 

Reserve  in  Banks 
and  Treasury. 

Total. 

United  States    . 
Great  Britain     . 
France      .     .     . 
Germany  . 
Italy      .... 
Russia       .     .     . 
Austria-  Hungary 
Spain    .... 
India    .... 
China  .... 
Siam     .... 

$859,000,000 
l82,8oo,OOO 
458,900,000 
132,800,000 
Il6,4OO,OOO 
385,800,000 
235,800,000 
78,800,000 
63,200,000 

$1,320,400,000 
530,400,000 
968,300,000 
801,400,000 
I4I,IOO,OOO 
783,700,000 
286,800,000 
78,800,000 
63,200,000 

$679,200,000 
115,800,000 
419,800,000 
208,600,000 
36,800,000 
101,900,000 
79,2OO,OOO 
173,700,000 
546,400,000 
345,800,000 
193,000,000 

I  ,OOO,OOO 

The  origin  of  money  is  to  be  sought  in  the  attempt  to  evade 
the  difficulties  of  barter.  As  soon  as  the  objects  to  be  ex- 
changed began  to  multiply,  the  need  of  some  one  commodity 
in  which  to  measure,  and  through  which  to  exchange,  the  others 

1  Arranged  from  Report  of  Secretary  of  Treasury,  1904,  p.  324. 


§  i88]  Kinds  of  Money.  451 

became  obvious.  Originally,  therefore,  all  money  was  merchan- 
dise ;  and  it  was  only  at  a  much  later  period  that  the  commodity 
was  stamped  or  coined. 

Historically,  almost  every  imaginable  commodity  has  been 
used  for  money.  Whatever  happened  to  be  common  and  at 
the  same  time  widely  wanted,  served  as  money.  Articles  of 
food  like  rice,  dried  fish,  olive  oil,  nuts,  wheat,  maize,  tea,  salt, 
dates,  tobacco  and  whisky ;  weapons  like  knives,  fire-arms,  sword- 
hilts,  powder  and  shot ;  implements  like  hoes,  shovels  and 
common  utensils ;  clothing  made  of  wool,  cotton,  leather, 
skins,  pelts  and  furs ;  animals  such  as  sheep,  horses  and  oxen ; 
ornaments  like  beads,  shells,  ivory  tusks,  fish  teeth  and  feathers ; 
and  metals  like  iron,  lead,  tin,  copper  and  bronze,  have  been 
employed  at  one  time  or  another.  In  every  developed  com- 
munity silver  and  gold  were  finally  selected  to  receive  the 
government  stamp  as  minted  or  coined  money,  because  they 
possess  in  a  peculiar  degree  the  attributes  of  transportability, 
divisibility,  homogeneity,  great  value  in  small  bulk,  durability, 
recognizability,  malleability  and  stability. 

188.  Kinds  of  Money. 

Money  may  be  classified  in  three  ways,  —  as  actual  and  ideal 
money,  as  standard  and  token  money,  as  metallic  and  paper 
money. 

(1)  Actual  money  is   that   which  actually  circulates.     Ideal 
money,  or  money  of  account,  is  that  in  which   accounts  are 
kept.     Its  use  may  be  due  to  necessity  or  to  habit.     In  the 
middle  ages,  when  actual  money  was  continually  tampered  with, 
the  merchants  were  compelled  to  keep  accounts  in  scudi  which 
were  not  coined.      Guineas  are  to-day  unknown  in   England 
and  shillings  in  America  ;   yet  sales  are  often  effected  in   Great 
Britain  in  guineas  instead  of  pounds ;  and  in  the  rural  districts 
of  the  Atlantic  seaboard  transactions  frequently  take  place  in 
shillings  in  lieu  of  dollars. 

(2)  Standard  money  is  coin  which  is  legal  tender  for  all  debts, 


452  Money.  [§  iS8 

of  full  weight,  and  used  as  a  standard  to  which  the  value  of  all 
other  money  is  referable.  The  value  of  the  coin  in  such  cases 
is  equal  to  that  of  the  bullion  contained  in  the  coin.  Token  or 
subsidiary  money  consists  of  coin  (a)  whose  legal  or  mint  value 
exceeds  that  of  .the  bullion,  (b)  whose  coinage  is  not  free  and 
(<:)  which  is  not  full  legal  tender. 

In  the  United  States  the  standard  is  the  gold  dollar,  contain- 
ing 23.22  grains  of  pure  gold.  The  smallest  gold  coin  actually 
issued  since  1890  is  the  quarter  eagle.  The  other  coins  are 
divided  into  three  classes:  (a)  The  minor  or  token  coins  are 
the  bronze,  copper  and  nickel  one,  two,  three  and  five  cent 
pieces.  Of  these  only  the  first  and  last  are  now  coined,  with 
legal  tender  quality  up  to  twenty-five  cents,  (b)  The  subsidiary 
silver  consists  of  the  dimes,  quarter  and  half  dollars,  which 
are  legal  tender  up  to  ten  dollars.  The  pure  silver  in  these 
is  proportionately  less  than  in  the  full  dollars,  in  order  to  pre- 
vent their  being  melted  down  or  exported.  The  dollars  con- 
tain 371$  grains  of  pure  silver,  the  half  dollar  only  173.61 
grains  (instead  of  185.8  grains),  (c)  The  third  class  consists 
of  the  silver  dollar,  which  is  now  in  fact  also  subsidiary,  because 
it  is  not  legal  tender  for  the  redemption  of  gold  certificates, 
because  there  is  no  free  coinage,  and  because  its  mint  value, 
since  the  recent  fall  in  the  price  of  silver,  is  far  superior  to  the 
bullion  value. 

The  term  free  coinage  is  employed  in  two  senses.  Govern- 
ments sometimes  make  a  charge  for  converting  bullion  into 
coin.  If  there  is  no  charge,  the  coinage  may  be  said  to  be  free. 
On  the  other  hand,  free  coinage  may  mean  the  right  of  any 
owner  of  bullion  to  have  it  converted  into  coin,  thus  profiting 
by  any  discrepancy  between  the  value  of  the  bullion  and  that  of 
the  coin.  Free  coinage  in  this  sense  is  now  permitted  in  ad- 
vanced countries  only  in  the  case  of  gold,  the  standard  money, 
where  there  can  accordingly  be  no  such  discrepancy.  When 
we  commonly  speak  in  America  of  the  free  coinage  of  silver, 
we  employ  the  term  in  this  second  sense.  Another  term  sus- 


§  1 88]  Kinds  of  Money.  453 

ceptible  of  a  double  meaning  is  seigniorage.  Ordinarily  it  sig- 
nifies the  mint  charge  made  by  government.  It  involves  to 
this  extent  a  difference  between  the  bullion  and  mint  value  of 
the  coin,  and  it  was  this  difference  which  accrued  to  the  medi- 
aeval seigneur  or  local  potentate  who  had  the  monopoly  of  coin- 
age. Seigniorage  in  this  sense  has  been  abolished  in  England 
and  America.  But  where,  as  in  the  United  States,  government 
purchases  a  quantity  of  silver  for  40  or  50  cents  and  converts  it 
into  a  coin  with  a  face  value  of  a  dollar,  the  difference  or  profit 
is  also  popularly  called  seigniorage.  This  profit,  which  has  of 
recent  years  amounted  to  large  sums,  will  obviously  be  wiped 
out  if  the  government  ultimately  melts  down  the  coin. 

(3)  Paper  money,  as  opposed  to  metallic  money,  may  also 
be  subdivided  into  three  classes,  —  representative,  fiat  and 
fiduciary  money,  (a)  Representative  money  consists  of  paper 
which  certifies  that  an  equivalent  amount  of  coin  or  bullion  is 
deposited  in  the  government  treasury.  Of  this  nature  are  the 
American  gold  and  silver  certificates,  which  represent  coin,  and 
the  fast-vanishing  treasury  notes,  which  represent  silver  bullion. 
The  issue  of  treasury  notes  began  in  1890  and  ceased  in  1893. 
Since  1900  it  has  been  the  policy  of  the  government  to  retire 
these  notes,  and  in  July,  1905,  there  were  only  between  nine 
and  ten  million  dollars  outstanding.  The  value  of  all  represen- 
tative money  obviously  depends  on  that  of  the  metallic  money 
which  it  replaces,  (b)  Fiat  money  consists  of  paper  whose 
value  rests  on  the  fiat  or  declaration  of  government.  Such 
money  must  sooner  or  later  be  bolstered  up  by  the  affixing  of  a 
legal  tender  quality,  that  is,  by  the  declaration  that  the  money  is 
good  legal  tender  in  discharge  of  all  debts.  Even  this,  how- 
ever, will  not  prevent  depreciation  unless  its  quantity  is  care- 
fully restricted  and  unless  it  is  kept  redeemable  in  metallic 
money.  The  difference  between  the  face  value  of  the  money 
and  the  real  value  of  the  paper  out  of  which  it  is  made  is 
virtually  a  seigniorage  amounting  in  this  case  to  practically  its 
entire  value.  Fiat  money  is  sometimes  called  soft  money,  in 


454  Money.  [§  189 

contrast  to  metallic  or  hard  money.  The  paper  money  issued 
by  the  American  colonies  as  well  as  the  currency  of  the  con- 
tinental congress  are  warning  examples  of  the  effects  of  irre- 
deemable paper  money.  The  present  "greenbacks"  retain 
their  value,  because  for  over  a  quarter  of  a  century  their  quantity 
has  been  strictly  limited  and  because  they  are  kept  redeemable 
in  gold.  The  advantage  of  basing  fiat  money  on  land  security 
is  illusory ;  in  pre-revolutionary  Pennsylvania  the  attempt  suc- 
ceeded only  because  the  issue  was  restricted ;  in  the  other 
colonies  as  well  as  in  the  case  of  the  revolutionary  French 
assignats,  when  this  precaution  was  not  observed  the  experi- 
ment ended  in  dire  failure.  Government  cannot  create  the 
value  of  money  ;  it  can  only  register  the  value  which  is  created 
by  economic  forces. 

(c)  Fiduciary  or  credit  money  consists  of  promises  issued  by 
private  or  semi-private  institutions,  to  pay  coin.  The  chief  ex- 
ample is  bank  notes.  Other  forms  of  credit,  like  checks,  ware- 
house receipts,  promissory  notes  and  bills  of  exchange,  play 
an  important  role  in  effecting  payments,  but  do  not  constitute 
money,  properly  so  called.  So  far  as  credit  money  serves  as  a 
medium  of  exchange  its  value  depends  on  the  extent  to  which 
the  promise  to  pay  will  be  kept,  that  is,  upon  its  ready  converti- 
bility into  coin.  Inconvertible  credit  money  is  not  a  whit  better 
than  irredeemable  fiat  money. 


189.  Value  of  Money  —  The  Quantity  Theory. 

Prices  of  single  commodities  may  rise  or  fall  because  of  rela- 
tive variations  in  the  forces  which  affect  particular  demand  and 
supply.  A  change  in  the  general  level  of  prices,  on  the  other 
hand,  involves  an  alteration  in  the  commodity  in  which  all 
values  are  estimated  or  prices  are  expressed.  A  change  in  the 
value  of  money  means  a  change  in  its  purchasing  power,  that  is, 
in  the  general  price  level.  The  value  of  money,  like  that  of 
every  other  commodity,  is  an  expression  of  its  marginal  utility. 


§  189]  Quantity  Theory.  455 

The  important  point,  then,  is  the  location  of  the  margin. 
We  can  approach  the  subject  from  the  point  of  view  of  the 
capacity  of  money  to  do  its  work  or  of  the  amount  of  work  to 
be  done. 

(i)  From  the  first  point  of  view  the  location  of  the  marginal 
increment  obviously  depends  on  the  number  of  increments. 
That  is,  the  greater  the  quantity  of  money,  the  lower  will  be  the 
margin,  and  hence  the  value.  To  assert,  as  some  do,  that 
money  differs  from  other  things  in  that  the  more  of  anything  else 
we  have  the  less  we  want,  while  the  more  money  we  have  the 
more  we  want,  is  to  confuse  money  with  general  purchasing 
power.  Everything  that  is  salable  has  purchasing  power.  No 
one  carries  with  him  or  hoards  more  than  a  small  sum  of 
money.  Whether  he  deposits  actual  coin  in  the  bank  or  wheat 
in  the  elevator  is  immaterial.  It  is  not  the  money,  but  the 
money's  worth,  that  constitutes  his  wealth.  If  we  say  that  the 
more  money  he  has  the  more  he  wants,  we  can  equally  well  say, 
the  more  wheat  he  has  the  more  he  wants.  Yet  that  does  not 
prevent  the  price  of  wheat  from  falling  as  the  supply  increases. 
This  does  not  mean  that  doubling  the  quantity  of  money  will 
result  in  doubling  the  general  price  level.  As  Gregory  King 
pointed  out  in  the  seventeenth  century,  wheat  will  rise  in  price 
faster  than  the  supply  falls.  King  estimated  that  a  deficiency  in 
the  harvest  of  one,  two,  three,  four  and  five  tenths  would  raise 
the  price  three,  eight,  sixteen,  twenty-eight  and  forty-five  tenths 
respectively.  But  although  the  relation  of  quantity  to  value  is 
not  precisely  proportionate,  it  is  none  the  less  real. 

While  the  quantity  of  money  is  of  importance  in  affecting  the 
location  of  the  margin,  the  efficiency  of  the  increment  at  the 
margin  must  not  be  overlooked.  This  is  what  is  called  the  rapidity 
of  circulation.  Rapidity  of  circulation  bears  the  same  relation 
to  quantity  of  money  as  the  productivity  of  labor  or  capital  to 
the  number  of  laborers  or  the  amount  of  capital.  In  an  ad- 
vanced community  and  with  a  great  intensity  of  business  the 
rapidity  of  circulation  may  be  such  that  a  smaller  quantity  of 


456  Money.  [§  189 

money  will  perform  the  same  work  as  a  larger  quantity  in  a 
backward  community  with  a  lesser  rapidity  of  circulation.  The 
value  of  money  or  price  level  in  the  two  communities  may 
then  be  the  same. 

(2)  On  the  other  hand,  we  may  approach  the  subject  from 
the  point  of  view  of  the  amount  of  work  to  be  done.  This  im- 
plies demand  for  money.  Demand  for  money,  however,  de- 
pends primarily  upon  the  extent  or  volume  of  business.  It  is 
also  affected  by  the  devices  or  substitutes  employed  to  do  the 
business.  In  modern  communities  these  assume  the  form  of 
credit  transactions,  to  be  discussed  in  the  next  chapter.  A 
country  which,  like  the  United  States,  commonly  uses  checks 
even  for  retail  payments,  needs  relatively  less  money.  Demand 
for  the  money  commodity  hence  depends  (a)  on  the  use  of  the 
commodity  for  other  than  monetary  purposes,  (b)  on  the  amount 
of  business  and  (c)  on  the  need  for  money  as  a  reserve  for 
credit  operations. 

The  general  law  of  the  value  of  money  may  thus  be  expressed 
in  the  equation  :  the  volume  of  money  multiplied  by  the  rapidity 
of  circulation  is  equal  to  the  number  of  transactions  in  cash 
that  are  effected  at  a  given  price  level.  The  so-called  "  quan- 
tity theory "  of  money,  about  which  there  has  been  much 
aimless  discussion,  does  not  mean  that  the  price  level  depends 
solely  on  the  amount  of  money,  but  that,  other  things  being 
equal,  that  is,  in  the  absence  of  relative  changes  in  the  other 
factors,  a  variation  in  the  quantity  of  money  will  produce  a 
change  in  the  price  level.  In  many  cases  this  is  the  con- 
trolling factor.  The  revolution  of  prices  in  the  sixteenth  cen- 
tury, for  instance,  was  due  to  the  discovery  of  the  American 
silver  mines ;  the  fall  of  prices  from  1873  to  1896  is  ascribable 
to  the  fact  that  the  increased  output  of  gold  did  not  keep  pace 
with  the  demands  of  business.  The  phrase  "  quantity  theory 
of  money  "  is  only  an  elliptical  way  of  stating  the  ordinary  law 
of  demand  and  supply. 


§  190]  Cost  of  Production.  457 


190.  Value  of  Money  —  Cost  of  Production. 

The  relation  of  the  value  of  money  to  its  cost  of  production 
does  not  involve  any  new  principle.  The  only  difference  be- 
tween money  and  other  commodities  is  that  the  influence  of 
cost  of  production  upon  the  supply,  and  therefore  upon  the 
value  of  money,  works  itself  out  more  slowly. 

The  value  of  money,  it  must  be  remembered,  is  not  due  to 
the  value  of  the  gold,  any  more  than  the  value  of  iron  beams  to 
that  of  iron  ore.  On  the  contrary,  just  as  the  value  of  iron  ore 
is  due  to  that  of  iron  beams  (and  other  iron  products),  so  the 
value  of  gold  is  due  to  the  value  of  money  (as  well  as  of  gold 
used  in  the  arts) .  Just  as  the  value  of  any  reproducible  com- 
modity tends  to  adjust  itself  to  the  point  of  marginal  cost,  so 
the  value  of  money  tends  to  adjust  itself  to  the  marginal  cost  of 
the  money  commodity.  A  decrease  in  the  expense  of  mining, 
such  as  that  which  has  been  effected  by  the  modern  cyanide 
process,  renders  possible  a  far  greater  output.  Since  the  pre- 
cious metals  are  exceedingly  durable,  however,  this  annual  in- 
crement forms  only  a  small  fraction  of  the  entire  available  supply 
and  will  not  produce  any  immediate  change  in  value.  Sooner 
or  later,  however,  an  alteration  in  the  rate  of  annual  increase 
will  make  itself  felt.  While  fluctuations  in  particular  prices  are 
often  sharp  and  sudden,  because  of  the  insignificance  of  the 
stock  on  hand  as  compared  to  the  quantities  that  can  be  pro- 
duced at  an  altered  cost,  the  variations  in  the  general  price 
level  due  to  changes  in  the  cost  of  money  are  far  more  gradual. 
These  variations,  moreover,  are  not  instantaneous  over  the  whole 
economic  field,  but  propagate  themselves  in  waves  from  com- 
modity to  commodity.  In  a  period  of  rising  prices,  for  in- 
stance, as  Cairnes  pointed  out,  crude  products  at  first  rise  more 
than  manufactures  and  animal  more  than  vegetable  products, 
while  wages  are  almost  always  the  last  to  advance.  Moreover, 
wholesale  prices  fluctuate  far  more  than  retail  prices,  as  is  ap- 


458  Money.  [§  190 

parent  from  the  charts  opposite  pages  458  and  459.  The 
method  of  ascertaining  these  average  prices  is  explained  on  the 
next  page. 

The  level  of  prices  may  be  affected  by  impulses  starting  from 
the  side  of  commodities  as  well  as  from  that  of  money.  The 
price  level  in  China  is  different  from  that  of  America.  In  Athens, 
at  the  time  of  Pericles,  money  was  worth  at  least  three  times  as 
much  as  to-day  ;  in  the  United  States  a  century  ago  the  pur- 
chasing power  of  money  was  far  greater  than  at  present.  The 
explanation  is  to  be  sought  in  the  general  conditions  of  demand 
and  the  circumstances  of  cost.  Modern  industrial  methods  lead 
to  vast  and  varied  consumption,  to  more  efficient  production 
and  to  higher  wages.  The  greater  command  of  wealth  and  the 
lower  real  cost  to  society  are,  however,  accompanied  by  the  higher 
money  prices  that  go  with  the  augmented  wages.  In  other  words, 
the  general  level  of  prices  tends  to  rise ;  that  is,  more  money 
is  needed  to  effect  the  exchanges.  This  can,  however,  come 
about  only  if  the  increased  supply  of  money  adjusts  itself  to  the 
newer  price  at  a  lower  cost  level.  Thus,  while  diversified  de- 
mand, augmented  consumption  and  mass  production  set  in 
motion  an  increase  of  prices,  they  must  be  accompanied  by  a 
reduction  in  the  relative  cost  of  producing  or  acquiring  the 
money  commodity  if  the  rise  is  to  be  permanent.  This  is 
what  happened  in  Germany  a  generation  ago,  and  what  is 
happening  on  a  far  greater  scale  in  Japan  at  present. 

Because  of  the  fact  that  values  of  commodities  as  well  as  of 
money  itself  are  constantly  changing,  it  is  not  always  easy  to 
measure  with  precision  the  variation  in  the  purchasing  power 
of  money.  The  best  expedient  is  that  of  the  so-called  index 
numbers.  Here  the  price  of  an  article  at  a  given  time,  or  its 
average  price  during  a  given  period,  is  taken  as  a  basis,  and 
called  100.  If  at  the  next  selected  date  the  price  has  risen 
one-tenth,  it  would  be  assigned  the  figure  no.  By  selecting 
several  articles  and  taking  the  average  of  the  figures  as  they  vary 
from  the  base  line  of  100,  we  reach  the  index  number. 


RELATIVE  WHOLESALE  AND  RETAIL  PRICES  OF  FOOD 
IN  THE  UNITED  STATES,   1890  TO  1903. 

[AVERAGE  PRICE  FOR  1890  TO   1899=100.] 


RELATIVE 
PRICES. 

1890  1891  1892  1893  1S94  1895  1896  1897  1898  1899  1900  1901  1902  1903 

113 
110 
114 

112 
110 

108 
103 
104 
102 
100 
98 
9G 
94 
92 
90 
88 
80 
84 
82 

S 

1 

X 

\ 

* 

/ 

i 

\ 

/ 

i 

\ 

^ 

XN 

\ 

/ 

% 

f 

V 

/ 

1 

^  ^^ 

-^- 

-^ 

^ 

"^X^ 

> 

' 

\ 

\ 

N 

,'' 

\ 

/ 

\ 

/ 

•  ~V 

/ 

\ 

„' 

- 

\ 

s 



=WHOLESALE  PRICES. 


=  RETAIL  PRICES. 

From  U.S.  Bulletin  54  0  904' 


RELATIVE  WHOLESALE  AND  RETAIL  PRICES  OF  FRESH   BEEF, 
1890  TO  1903. 

(AVERAGE  PRICE  FOR   1890  TO   1899  =  100.1 


PRICES. 

1890  1891  1892  1893  1894  1895  1896  1897  1898  1899  1900  1901  1902  1903 

126 

_ 

124 
1:22 

t 

i 

t 

1 

i  A 

r* 

/ 

\. 

I 

112 

- 



\s 

110 

108 

. 

./ 

_/3 

\ 

106 

- 

V 

j 

,  — 

/ 

' 

/ 
/ 

« 
1 

104 

—  JL 

\ 

/~ 

\ 

/  ^ 

x^ 

•  ^ 

1 

1 

102 

- 

1 
1 

\ 

\ 

/ 

\ 
\ 

—  -f- 

\ 

^*** 

f^^^ 

-J^SN 

— 

100 

..  i 

"MS-Jjj 

*== 

=^ 

—*  — 

-%=? 

j^^4 

£*.-  —  1 

98 
96 

- 

i 

-  v 

\ 
\ 

/ 

-"-  — 

• 

Uv> 

1 

\ 

/ 

90 

f 

\ 

_-_  =  WHOLESALE  PRICES. 


=RETAIL  PRICES. 

From  U.S.  Bulletin  54(1904) 


RELATIVE  PRICES  OF  RAW  AND  MANUFACTURED  COMMODITIES, 
1890  TO  1903. 

[AVERAGE  PRICE   FOR  1890  TO  1899=100.J 


r»  C£S. 

1890  1891  1892  1893  1894  1895  1896  1897  1898  1899  1900  1901  1902  19 

122 
120 
118 
116 
114 
112 
110 
108 
106 
104 
102 
100 
98 
96 
94 
92 
90 
88 
86 
84 

.•»•"•' 

/ 

r 

m£ 

/ 

•  * 

\ 

1 

\ 

t 

"^^^ 

.   * 

s 

""••«• 

0^^ 

S  i 

/> 

'S^N 

^ 

s 

X 

^  --, 

f  f 

V 

L 

t 

/ 

\\ 

i 

/ 

\\ 

/ 

/ 

\\ 

// 

3 

!/ 

\ 

^ 

/ 

\ 

*  *•  ^ 

^v^ 

/* 

\ 

v  —  ^ 

// 

\ 

s 

\ 

s 

\ 

s_ 

-.—RAW  COMMODITIES. 


^MANUFACTURED  COMMODITIES. 

From  U.S.  Bulletin  54'19i 


CHART  SHOWING  COMPARATIVE  MOVEMENT 

OF  WHOLESALE   PRICES  IN  THE  UNITED  STATES 

GREAT  BRITAIN,  AND  GERMANY,  1878  TO  1901. 


CENT 

120 
115 
110 
105 
100 
95 
90 
85 
80 

75 
70 

A  UNITED  STATES. 
B-H.+-H.GREAT  BRITAIN. 
C  GERMANY. 

/ 

\ 

U£2 

s 

E 

L^C; 

*s- 

x 

c 

3 

/ 

<  \ 

V- 

-^ 

2 

v 

r 

+** 

-B- 

I 

K 

i/^ 

^^^* 

x 

'M 

< 

**• 

XN 

x 

/ 

33 

A 

s— 

-r-- 

"^3*** 

7 

YN^^^V 

>^^ 

1 

^ 

t—  cc    oo    oo    o 

o»SSx»S§SSIilS  £a 

B     OS     OS     0     O     0 

siliiiillilliilisllllli 

From  Report  of  the  U.S.  Industrial  Commission. VoL.XIX 


§  190]  Cost  of  Production.  459 

The  utility  of  the  index  number  method  depends  partly  on 
the  number  and  choice  of  the  commodities  selected,  partly  on 
the  decision  to  use  retail  or  wholesale  prices,  partly  on  the  kind 
of  average  employed.  Among  the  various  kinds  of  averages 
which  can-  be  used  in  any  mathematical  computation,  are  the 
arithmetic,  the  geometric  and  the  harmonic  average.  The  arith- 
metic average  is  reached  by  adding  a  given  set  of  quantities 
together  and  dividing  by  their  number.  The  geometric  average 
is  found  by  multiplying  a  number  of  quantities  and  extracting  a 
root  equivalent  to  that  number.  The  harmonic  average  is  what 
the  mathematicians  call  the  reciprocal  of  the  arithmetic  average. 


ERRATUM 

Page  459,  lines  10-13  should  read  as  follows  : 

The  harmonic  average  is  what  the  mathematicians  call  the 
reciprocal  of  the  arithmetic  average  of  the  reciprocals  of  the 
quantities.  In  the  case  of  prices  there  is  a  further  choice 
between  the  simple  or  the  weighted  average. 


nowever,  belongs  more  properly  to  the  science  of  statistics.  It 
will  be  of  interest,  nevertheless,  to  append  herewith  (page  460) 
a  table  showing  the  changes  in  the  general  price  level  for  the 
past  quarter  of  a  century  in  the  United  States  as  compared  with 
Great  Britain  and  Germany. 

On  the  chart  opposite  page  459,  the  same  facts  are  illustrated 
by  lines  instead  of  figures.  In  the  table  on  page  423,  the 
system  of  index  numbers  is  likewise  employed. 

1  For  details  see  above,  §  186.  They  are  all  explained  at  considerable 
length  in  the  Bulletin  of  the  Department  (now  Bureau)  of  Labor,  no.  39, 
1902. 


RELATIVE  PRICES  OF  RAW  AND  MANUFACTURED  COMMODITIES, 
1890  TO  1903. 

[AVERAGE  PRICE   FOR  1890  TO   1899=100.] 


»ELAT<Vl 
MfCti. 

1890  1891  1892  1893  1894  1895  1896  1897  1898  1899  1900  1901  1902  19 

122 
120 
118 
116 
114 
112 
110 
108 
106 
104 
102 

»nn 

—  —  - 

/ 

f 

, 

/ 

•  •"* 

% 

1 

\ 

i 

^"••^ 

\ 

* 

*•  «•  m 

^^ 

\N 

/  j 

^^ 

^ 

N 

X 

^  1 

/  / 

% 

i 

j 

/ 

\ 

/ 

/ 

\\ 

/ 

f 

115 
110 
105 
100 
95 
90 
85 
80 

75 
70 

/W 

C  GERMANY. 

B'Zj^>,V 

c// 

rVJ 

\ 

/ 

V  -, 

s' 

^ 

G 

•B- 

/ 

^» 

^*"  ***^^^ 

I 

^> 

+* 

X*\J 

x 

/*f*** 

A 

\ 

iJi'-r*"^.***^/ 

YNJ***'/ 

3 

^[ 

c;  c 
i—  a 

00    C 
**•    t 

^•>ao<Baoaowao«04D0*4katakOi    ctc^cscscsoo 

Jcooooocoaooocooocoaooocoooao     oocococoaoaocs 

Frotn  Report  of  the  U.S.  Industrial  Comnois9toruVol..XIX 


§  190]  Cost  of  Production.  459 

The  utility  of  the  index  number  method  depends  partly  on 
the  number  and  choice  of  the  commodities  selected,  partly  on 
the  decision  to  use  retail  or  wholesale  prices,  partly  on  the  kind 
of  average  employed.  Among  the  various  kinds  of  averages 
which  can  be  used  in  any  mathematical  computation,  are  the 
arithmetic,  the  geometric  and  the  harmonic  average.  The  arith- 
metic average  is  reached  by  adding  a  given  set  of  quantities 
together  and  dividing  by  their  number.  The  geometric  average 
is  found  by  multiplying  a  number  of  quantities  and  extracting  a 
root  equivalent  to  that  number.  The  harmonic  average  is  what 
the  mathematicians  call  the  reciprocal  of  the  arithmetic  average. 
In  the  case  of  prices  of  commodities  there  is  still  another  choice, 
known  as  that  between  the  simple  or  the  weighted  average. 
Weighting  means  assigning  to  each  article  an  importance  pro- 
portionate to  the  amount  sold  or  to  some  other  criterion,  which 
distinguishes  one  commodity  from  another.  In  practice,  how- 
ever, it  has  been  found  that  there  is  not  enough  difference 
between  these  various  methods  seriously  to  impair  the  value  of 
the  result.  The  best  known  index  numbers  are  those  of  the 
London  Economist,  of  Messrs.  Palgrave,  Soetbeer,  Sauerbeck, 
Falkner,  Commons,  Dun,  and  of  the  United  States  Labor 
Bureau.1  Without  some  form  of  index  number  it  is  virtually 
impossible  to  make  more  than  a  mere  guess  at  the  rise  or  fall  in 
the  general  price  level.  An  adequate  discussion  of  this  subject, 
however,  belongs  more  properly  to  the  science  of  statistics.  It 
will  be  of  interest,  nevertheless,  to  append  herewith  (page  460) 
a  table  showing  the  changes  in  the  general  price  level  for  the 
past  quarter  of  a  century  in  the  United  States  as  compared  with 
Great  Britain  and  Germany. 

On  the  chart  opposite  page  459,  the  same  facts  are  illustrated 
by  lines  instead  of  figures.  In  the  table  on  page  423,  the 
system  of  index  numbers  is  likewise  employed. 

1  For  details  see  above,  §  186.  They  are  all  explained  at  considerable 
length  in  the  Bulletin  of  the  Department  (now  Bureaii)  of  Labor,  no.  39, 
1902. 


460 


Money. 


[§  191 


COMPARATIVE  MOVEMENT  OF  WHOLESALE  PRICES  IN 
THE  UNITED  STATES,  GREAT  BRITAIN  AND  GER- 
MANY, 1878  TO  1901,  AVERAGE  PRICES  FOR  1879-89 
BEING  loo.1 


Year. 

United 
States. 

Great 
Britain. 

Germany. 

1878-79   
1879-80 

89 
IO7 

112 

IO7 

TO'' 

1880-81    
1881-82    
1882-83 

107 
120 
III 

114 
110 

108 

110 

107 

IO4 

188:5-84   . 

I  O2 

106 

IO"? 

1884-8; 

Q4 

QC 

QO 

-  1885-86   
1886-87    

00 
QO 

91 
88 

94 
07 

1887-88 

Q? 

8g 

04 

1888-89   
1880-00  . 

94 

QO 

93 
a? 

97 

IOO 

1800—01  . 

qc 

Q-J 

106 

iSoi-o'* 

QO 

QI 

08 

1892-93  

1  8o"l—  04 

00 
82 

87 
8c 

95 

Q2 

1894-95    
1895-96    
1806-07 

81 

77 
T\ 

79 
79 

70 

83 
82 
82 

1897-98    

1808-00 

79 

77 

82 
84 

83 
84 

1899-1900  

1900-1901    

00 

88 

93 
94 

IOO 

191.   Stability  of  Money  —  Bimetallism. 

Inasmuch  as  money  is  itself  a  commodity,  its  value  is  subject 
to  fluctuation.  The  effort  of  business  life  is  to  reduce  these 

1  From  United  States  Industrial  Commission  Report,  XIX,  38.  The 
index  numbers  for  the  United  States  are  those  of  Commons ;  for  Great 
Britain,  those  of  Sauerbeck ;  for  Germany,  those  of  Conrad.  The  index 
numbers  for  Great  Britain,  as  originally  compiled,  are  based  on  the  prices 
for  the  years  1867-1877,  but  have  been  converted  to  the  base  of  1879- 
1889  f°r  comparison.  The  index  numbers  for  the  United  States  are  for 
the  crop  or  fiscal  year  July  i  to  June  30,  while  those  for  Germany  are 
calendar  years,  and  those  for  Great  Britain  are  calendar  years,  1879-1883, 
and  thereafter  crop  years. 


§  191]  Stability.  461 

fluctuations  to  a  minimum  and  to  insure  stability  in  the  value 
of  money. 

From  the  time  "that  business  activity  began  on  a  large  scale 
in  thirteenth-century  Europe  gold  and  silver  were  used  inter- 
changeably as  mone}*.  The  conditions  of  supply  were  such 
that  a  unit  of  gold  was  worth  about  ten  or  eleven  units  of  silver ; 
that  is,  the  market  ratio  was  one  to  ten  or  eleven.  Like  all 
market  ratios,  however,  this  was  subject  to  constant  oscillation. 
The  legal  or  mint  values  of  the  coins  were  fixed  in  each  com- 
munity, and  advantage  of  this  fact  was  taken  by  the  money- 
changers to  export  or  to  melt  down  the  over-valued  or  dearer 
metal.  The  result  was  an  attempt  on  the  part  of  government 
to  prevent  the  disappearance  of  the  one  or  the  other  metal,  by 
drastic  but  unavailing  prohibitions  of  exportation  and  by  re- 
peated changes  in  the  metallic  contents  of  the  coins.  The 
confusion  was  heightened  by  the  action  of  the  princes  in  reduc- 
ing the  purity  or  weight  of  the  coins  in  order  to  profit  by  what 
was  a  virtual  confiscation.  The  discovery  of  the  new  world 
had  a  double  effect.  Between  1500  and  1560  the  annual 
product  of  gold  increased  about  50  per  cent,  that  of  silver  about 
600  per  cent.  Not  only  did  prices  rise  enormously,  but  the 
value  of  silver  relatively  to  gold  now  fell  so  that  the  ratio  was 
about  15  to  i.  By  the  beginning  of  the  nineteenth  century, 
when  the  ratio  was  about  16  to  i,  the  futility  of  the  mediaeval 
methods  of  regulation  was  recognized  in  England,  and  the 
system  of  bimetallism  was  abandoned,  gold  being  definitely 
selected  as  the  standard.  The  other  countries  of  the  world 
followed  slowly.  The  adoption  of  the  gold  monometallic  sys- 
tem has  been  accelerated  by  the  events  of  the  last  quarter  of 
the  nineteenth  century.  The  discovery  of  the  Comstock  lode 
and  the  opening  up  of  other  recent  cheap  sources  of  supply  so 
enormously  increased  the  output  of  silver  that  its  value  dimin- 
ished rapidly  until  the  ratio  of  silver  to  gold  now  fluctuates  from 
between  35  and  40  to  i. 

The  following  table  will  show  the  changes  in  the  production 


462 


Money. 


[§  191 


of  gold  and  silver  since  the  discovery  of  America,  arranged  by 
periods  of  twenty  years  during  the  sixteenth  century,  when  the 
first  great  changes  occurred ;  then  by  periods  of  hundred  years 
during  the  next  two  centuries,  during  which  the  output  of 
silver  increased  only  slowly ;  then  by  fifty  years  up  to  the  gold 
discoveries  in  the  middle  of  the  nineteenth;  then  by  five- 
year  periods  after  the  discovery  of  the  Comstock  lode  in  the 
seventies;  and  finally  by  annual  periods  since  the  recent  pro- 
digious increase  in  the  output  of  gold : 

PRODUCTION   OF  GOLD   AND   SILVER   SINCE   THE 
DISCOVERY    OF   AMERICA.1 


GOLD. 

SILVER  (Coining  value.) 

Total. 

Average 
Annual. 

Total. 

Average 
Annual. 

1493-1520 

$107,931,000 

$3,855,000 

$54,703,000 

$1,954,000 

1521-1544 

114,205,000 

4,759,000 

89,986,000 

3,740,000 

1545-1560 

90,492,000 

5,656,000 

207,240,000 

12,952,000 

1561-1580 

90,917,000 

4,546,000 

248,990,000 

12,450,000 

1581-1600 

98,095,000 

4,905,000 

348,254,000 

17,413,000 

1601-1700 

606,315,000 

6,063,000  j  1,547,731,000 

15,477,000 

1701-1800 

1,262,805,000 

12,628,000 

2,370,809,000 

23,708,000 

1801-1850 

787,463,000 

15,745,000 

1,360,237,000 

27,204,000 

1851-1875 

3,173,869,000 

1  26,954,000 

1,288,757,000 

51,548,000 

1876-1880 

572,931,000 

114,586,000 

509,256,000 

101,851,000 

1881-1885 

495,582,000 

99,116,000 

594,773,000 

118,955,000 

1886-1890 

564,474,000 

112,895,000 

704,074,000 

140,815,000 

1891-1895 

814,736,000 

162,947,000 

1,018,718,000 

203,742,000 

1896-1900 

1,286,494,000 

257,298,000 

1,071,148,000 

2I2,274,OOO 

1901 

260,992,000 

260,992,000 

223,691,000 

223,691,000 

1902 

296,049,000 

296,049,000        208,594,000 

208,594,000 

1903 

325,527,000 

325,527,000 

220,371,000 

22O,37I,OOO 

In  the  charts  opposite  pages  462  and  463  the  same  facts  in 
somewhat  more  detail  are  shown  for  the  more  important  periods 
of  the  nineteenth  century,  not  alone  for  the  world  in  general,  but 

1  Arranged  from  Report  of  Secretary  of  the  Treasury,  1904,  p.  416. 


PRODUCTION  OF  SILVER  IN  TH€  PRINCIPAL  COUNTRIES  OF  THE  WORLD 
FROM  1875  TO   1.903;  IN  TROY  OUNCES. 


$ 

l.2( 
1.1X 
0.81 
O.G( 
0.4( 
0.2( 

Ifi 

) 
) 
) 
) 
J 
) 

75                    1880                     1885                     1890                    1895  69,000,000  1900          190 

OUNCES 

/° 

y 

s 

/ 

7 

s 

60,000,000 

o/ 

f 

\ 

,  s^  ,  — 

7S°X 

-M- 

i 

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\ 

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v 

H 

'mi 

/> 

r     45,000,000 

r 

/ 

/ 

& 

y 

| 

\ 

**** 

—7 

^•^ 

"    \^PR  CE  PER  £g 

y 

30,000,000 

/ 

wE^k 

/ 

^ 

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o—o  .0-°-°''" 

^ 

•*», 

^ 

7 

.0-0-0 

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-'- 

60 

^;      * 

PRODUCTION  OF  GOLD  AND  SILVER  IN  THE  UNITED  STATES 
FROM  1845  TO  1904. 

:==jp;2 

60,000, 
50,000, 
40,000, 
30,000, 
20,000, 
10,000, 

n 

000  -  - 

4      .<?  '  _ 

II 

yilHNlllllIM 

5I8«liISSS5SSSSS 

ig 

1 

§1 

3 

From  Report  of  the  U.S.  Industrial  Commission,  Vol.  XIX 


PRODUCTION  OF  GOLD  IN  THE   PRINCIPAL  COUNTRIES  OF  THE  WORLD 

FROM  1875  TO  1903;  VALUES  IN   UNITED  STATES  CURRENCY. 
1875  1880  1885  1890  1895  1900  1903 


From  U.S.  Industrial   Commissior    Vol.  XIX. 


§  I9l] 


Bimetallism. 


463 


for  the  United  States  in  particular.  In  the  following  table  will 
be  found  the  salient  figures  illustrating  the  fall  in  the  price  of 
silver  since  1873  : 

THE   FALL   IN   THE   VALUE   OF   SILVER   SINCE    1873. 


Price  per  oz.  of  Bar 
Silver  in  London. 

Bullion  Value  of 
Silver  Dollar. 

Ratio  of  Silver 
to  Gold. 

1873 

59&A 

$1.004 

15-93 

1875 

5<4id. 

.961 

16.64 

l88o 

52*  d. 

.885 

18.05 

1885 

48^  d. 

.823 

19.41 

1890 

47*  d. 

.809 

19-75 

1895 

29H  d. 

•5°5 

31.60 

1900 

28  A  d. 

•479 

33-33 

1901 

27i35  d. 

.461 

34.68 

1902 

24TI  d. 

.408 

39.15 

1903 

24!  d. 

.420 

38.10 

1904 

rflt  d. 

•447 

35-70 

Finally,  it  may  be  of  interest  to  append  on  page  464  a  table, 
which  shows  the  various  countries  which  furnish  at  present  the 
world's  supply  of  gold  and  silver. 

It  was  the  fall  in  the  value  of  silver  after  1873  which  led  to  the 
so-called  "  silver  movement  "  in  the  United  States.  Up  to  that 
time  the  problem  had  not  aroused  much  popular  interest.  In 
1791  the  mint  ratio  of  silver  to  gold  was  fixed  at  15  to  i,  and  as 
gold  was  slightly  underrated,  it  slowly  disappeared  from  circula- 
tion in  conformity  with  the  principle  to  be  described  in  §  192. 
In  1834  the  ratio  was  changed  to  16  to  i,  and  in  1837  was  again 
slightly  modified  so  as  to  stand  at  15.98  to  i.  Silver  was  now 
underrated  and  gradually  vanished.  By  the  end  of  the  seventies 
the  market  ratio  had  become  1 8  or  20  to  i,  and  gold,  now  being 
worth  more  in  the  market  than  at  the  mint,  would  have  disap- 
peared had  not  the  free  coinage  of  silver  been  suspended  in 
1873,  by  the  act  which  was  later  on  called  by  the  Free  Silver 
advocates  the  "Crime  of  1873." 


464 


Money. 


[§  191 


The  silver  producers  now  thought  that  the  fall  in  the  price  of 
silver  could  be  arrested  by  artificially  increasing  the  demand. 
They  were  joined  after  a  time  by  the  Western  farmers,  who 
ascribed  the  fall  in  the  price  of  wheat  to  the  competition  in  the 
silver  standard  countries,  and  who  believed  that  the  remonetiza- 
tion  of  silver  would  increase  prices  by  augmenting  the  money 
supply.  The  results  of  this  union  of  forces  were  the  Bland- 

WORLD'S   PRODUCTION   OF   GOLD  AND   SILVER   IN    1903. 


GOLD. 

SILVER. 

Coining 
Value. 

Commercial 
Value. 

United  States    .     . 
Mexico      .... 
Canada     .... 

$73,591,700 
10,677,500 
18,834,500 
67,998,100 
89,210,100 
24,632,200 
11,428,900 
1,000 

29,153,200 

$70,206,000 
91,151,400 
4,O72,2OO 
443,800 
12,519,300 
196,300 

11,597,100 
30,185,500 

$29,322,000 
38,070,000 
1,700,800 
185,300 
5,228,700 
82,000 

4,843,600 
12  ,67  7,  200 

Australasia   .     .     . 
Russia 

India    
Bolivia      .... 
Other  countries 

Whole  world     .     . 

325,527,200 

220,371,600 

92,039,000 

Allison  Act  of  1878,  which  directed  the  Secretary  of  the  Treasury 
to  purchase  at  the  market  price  not  less  than  two  nor  more  than 
four  million  dollars'  worth  of  silver  per  month,  and  the  Sherman 
Act  of  1890,  which  substituted  for  this  the  monthly  purchase  of 
four  and  a  half  million  ounces  of  silver,  to  be  paid  for  in  treasury 
notes.  In  the  course,  of  a  few  years  the  gradual  accumulation  of 
silver  drove  out  the  gold,  and  so  endangered  the  stability  of  the 
gold  reserve  that  during  thg  crisis  of  1893  the  Sherman  law  was 
repealed.  After  several  years  of  violent  political  agitation  and  two 
presidential  campaigns,  accompanied  on  the  one  hand  by  a  pro- 
gressive fall  in  the  value  of  silver,  and  on  the  other  by  a  rise  in 


§  i9ij  Bimetallism.  465 


the  general  level  of  prices,  the  gold  standard  was  definitely 
adopted  in  1900. 

In  the  mean  time  not  only  had  the  Latin  Union  —  an  assem- 
blage of  certain  European  countries  during  the  last  quarter  of 
the  nineteenth  century  to  maintain  the  price  of  silver  by  agree- 
ing to  the  use  of  a  large  silver  currency  —  come  to  an  end,  but 
even  former  silver  standard  countries  like  India  and  Japan 
went  over  to  the  gold  standard,  the  former  virtually  in  1893, 
the  latter  frankly  in  1898.  Finally,  the  various  countries  of 
Latin  America  are  now  on  the  brink  of  adopting  the  gold 
standard,  and  some  have  done  so  during  the  past  few  years. 

The  project  of  bimetallism  rests  upon  three  fallacies  :  (i)  The 
first  is  the  idea  that  there  can  ever  be  more  than  a  single 
standard  in  actual  operation.  (2)  The  next  mistake  is  the 
theory  that  government  action  can  fix  values.  While  purchases 
of  silver  by  a  government  may  temporarily  increase  the  demand, 
the  limit  must  soon  be  reached,  and  the  normal  influences  of 
value  conditions  will  reassert  themselves.  The  Bland  Act  of 
1878,  as  well  as  the  Sherman  Act  of  1890,  was  impotent  to 
arrest  the  decline  in  the  price  of  silver.  (3)  The  final  error  is 
the  belief  that  an  international  agreement  would  be  practicable, 
even  if  desirable. 

The  various  international  monetary  conferences,  the  free  silver 
movement  in  America  and  the  Latin  Union  in  Europe  were 
inspired  by  the  belief  that  the  fall  in  prices  was  a  result  of  the 
appreciation  of  gold  due  to  the  demonetization  of  silver  and 
the  resulting  insufficiency  of  money,  coupled  with  the  belief  that 
the  remonetization  of  silver  would  reintroduce  the  old  ratio  of 
1  6  to  i.  The  prodigious  increase  in  the  output  of  gold  in 
recent  years  has  effectually  disposed  of  the  belief  that  there  is 
not  enough  gold  ;  and  the  still  larger  increase  in  the  output 
of  silver  has  made  quite  impossible  any  idea  of  a  return  to  the 
old  ratio  of  16  to  i.  There  is  every  probability  that  the  con- 
troversy in  this  form  has  been  laid  to  rest.  Gold  monometal- 
lism has  come  to  stay. 

30 


466  Money.  [§  191 

The  endeavor  to  secure  a  greater  stability  of  prices  through 
bimetallism  or  symmetallism l  may  therefore  be  considered  a 
thing  of  the  past.  In  order  to  prevent  changes  in  the  relations 
of  debtor  to  creditor  due  to  fluctuations  in  the  value  of  money, 
other  standards  of  deferred  payments  have  been  suggested. 
Among  these  the  most  important  is  the  multiple  or  tabular 
standard.2  The  unit  of  measure  would  here  be  the  aggregate 
price  of  a  number  of  commodities,  whose  values  might  be 
reached  by  a  method  of  index  numbers.  Even  if  such  a  system 
were  practicable  —  a  fact  open  to  the  most  serious  question  — 
it  may  be  impugned  on  the  general  ground  that  for  short-time 
debts  it  is  not  needed  and  for  long-time  debts  there  is  no 
assurance  that  the  two  parties  will  be  put  in  a  more  equal 
position  than  if  ordinary  money  is  used.  By  returning  the  same 
amount  of  goods  as  is  sought  to  be  accomplished  by  the  tabular 
standard,  the  advantage  of  a  rise  of  prices  would  accrue  to  the 
creditor,  and  that  of  a  fall  to  the  debtor.  With  all  its  short- 
comings, therefore,  the  gold  standard  seems  to  be  the  one  which 
involves  the  least  injustice  to  both.  Even  where  there  is  an 
appreciation  of  the  money  standard,  the  increased  burden  on 
the  debtor  tends,  as  is  now  well  established,  to  be  offset  in 
large  measure  by  a  reduction  in  the  rate  of  interest.  Theory, 
no  less  than  business  practice,  is  emphatic  in  its  support  of  the 
gold  standard. 

1  Bimetallism  means  the  conjoint  use  of   gold    and    silver  coins; 
symmetallism  contemplates  a  single  coin  composed  of  the  two  metals. 

2  Many  other  standards  have  been  proposed.     Walsh,  who  has  de- 
voted an  entire  volume  to  this  topic.  Fundamental  Problem  in  Monetary 
Science,   part   4,    sums    them    up   as   the   commodity,    wages  and  cost 
standards.     Edgeworth,  in  pp.  162-164  of  his  Report  of  1889,  mentioned 
in  §  186,  discusses  them  under  the  names  of  the  capital,  consumption, 
currency,  income,  indefinite,  production  and  wages  standards.      Kinley, 
Money,  ch.  xiii,  mentions  the  labor  time,  labor  cost,  disutility  of  labor 
marginal  utility,  total  utility  and  purchasers'  surplus  standards. 


§  192]  Distribution  of  Money.  467 

192.   Distribution  of  Money. 

When  different  grades  of  an  article  can  be  secured  for  the 
same  price,  individuals  use  the  better  one ;  when  different 
grades  of  money  are  in  existence,  they  use  the  poorer  one. 
If  rancid  butter  is  put  on  the  market  in  competition  with 
good  butter  at  the  same  price,  no  one  will  take  it ;  if  poor 
money  is  found  in  circulation  with  good  money,  it  will  drive 
the  other  out.  The  unfit  butter  is  eliminated ;  the  unfit  money 
survives.  In  the  first  case  the  individuals  act  as  buyers,  in  the 
second  as  sellers.  The  use  of  money  is  not  its  consumption, 
but  its  alienation  in  order  to  secure  things  that  can  be  consumed. 
Hence,  so  long  as  the  poor  money  has  legal  tender  equally  with 
the  good,  individuals  can  make  profits  by  melting  or  exporting 
the  latter  and  paying  out  the  former,  This  principle  is  known 
as  Gresham's  law. 

The  name  Gresham's  law  is  due  to  the  fact  that  a  Scotch 
writer,  McLeod,  who  was  not  familiar  with  the  history  of  eco- 
nomic thought,  happened  half  a  century  ago  to  find  the  idea  in 
a  report  to  Elizabeth  by  Sir  Thomas  Gresham.  In  reality,  it 
is  expressed  more  fully  and  forcibly  by  many  of  the  earlier 
mediaeval  writers,  not  to  speak  of  those  of  classic  antiquity. 
It  applies  to  three  cases:  (i)  under-weight  or  debased  coin 
as  compared  with  full-weight  coin  of  the  same  metal ;  (2)  coin 
of  one  metal  whose  bullion  value  is  less  than  coin  of  another 
metal;  (3)  paper  money  as  contrasted  with  metallic  money. 
Gresham's  law,  however,  operates  only  under  two  conditions. 
First,  the  total  amount  of  money,  good  and  bad,  must  be  in 
excess  of  the  country's  needs.  If  the  poorer  money  is  limited 
in  quantity,  the  good  money  may  continue  to  circulate  because 
there  is  not  enough  of  the  other  to  go  around.  Secondly,  cus- 
tom or  public  opinion  may  force  the  circulation  of  the  better 
money,  as  in  the  case  of  the  use  of  gold  in  preference  to  green- 
backs on  the  Pacific  slope  during  the  civil  war  and  after. 

The  distribution  of  metallic  money  is  in  large  measure  the 


468  Money.  [§  192 

result  of  international  forces.  Some  commodities  have  an  in- 
ternational, others  only  a  local,  market.  The  price  level  in  each 
country  is  a  result  of  both  considerations.  Every  nation  will 
under  normal  conditions  secure  enough  money  to  preserve  this 
relative  price  level.  If  there  is  an  abnormal  increase  in  the 
quantity  of  gold  in  one  country,  it  will  tend  to  produce  higher 
prices,  augmenting  imports  of  commodities  and  exports  of  gold 
until  the  equilibrium  is  restored.  There  may  indeed  be  many 
influences  to  retard  this  process.  If  the  increased  supply  of 
gold  comes  from  the  mines,  it  may  be  at  once  exported  as  a 
commodity,  or  it  may  go  to  the  bank  reserves  and  flow  out  under 
banking  operations  without  sensibly  affecting  the  general  price 
level.  Moreover,  through  the  intervention  of  credit  transactions 
(to  be  discussed  in  the  next  chapter),  there  may  be  a  tempo- 
rary change  in  prices,  unaccompanied  by  any  movement  of  gold. 
But  as  all  credit  finally  rests  on  the  basis  of  metallic  money, 
there  can  be  no  long-continued  disarrangement  of  the  equi- 
librium without  setting  into  motion  the  forces  working  for  its 
re-establishment. 

The  equilibrium  is  one  between  relative  price  levels,  which 
is  only  another  way  of  stating  the  relative  amounts  of  metallic 
money  in  each  country.  Any  sudden  alteration  in  the  use  of 
credit  devices  will  exert  its  temporary  effect ;  but  in  the  long  run 
there  is  a  close  relation  between  the  price  level  and  the  money 
supply.  Under  healthy  fiscal  conditions,  that  is,  when  the  cur- 
rency is  on  a  metallic  basis,  the  amount  of  money  in  any 
country  will  be  self-regulative  and  adequate  to  maintain  the 
relative  price  level.  In  other  words,  as  we  shall  see  later  from 
another  point  of  view  (§  201),  the  international  distribution  of  the 
precious  metals  accommodates  itself  to  the  international  trade 
which  would  take  place  if  there  were  no  money  at  all.  Since 
money  is  the  instrument  of  trade,  the  distribution  of  money 
follows  the  conditions  of  trade,  and  not  vice  versa. 


CHAPTER   XXIX. 
CREDIT. 

193.  References. 

J.  S.  Mill,  Principles,  bk.  iii,  chs.  xi-xiii;  N.  G.  Pierson,  Principles 
(1902),  part  2,  ch.  ii;  W.  S.  Jevons,  Investigations  in  Currency  (1884), 
chs.  i,  v-viii,  and  Money  (1879),  c^s-  xvii-xxii;  F.  A.  Walker,  Political 
Economy  (1888),  part  3,  ch.  vi;  T.  Veblen,  Theory  of  Business  Enterprise 
(1904),  ch.  v. ;  C.  F.  Dunbar,  Chapters  on  the  History  and  Theory  of 
Banking  (2d  ed.,  1901),  and  Economic  Essays  (ed.  by  Sprague,  1904) ; 
D.  Kinley,  Money  (1904  ),  chs.  xi,  xvit ;  Horace  White,  Money  and  Bank- 
ing (2d  ed.,  1902),  bks.  ii-iii;  W.  Bagehot,  Lombard  Street  (1873)  5  c-  A- 
Conant,  A  History  of  Modern  Banks  of  Issue  (1896) ;  J.  G.  Cannon,  Clear- 
ing Houses  (1900) ;  F.  A.  Cleveland,  The  Bank  and  the  Treasury  (1905) ; 
R.  M.  Breckenridge,  Discount  Rates  in  the  United  States  (Polit.  Sci.  Quart., 
X.  1905)  ;  J.  V.  Komorzynski,  Die  Nationalokonomische  Lehre  vom  Credit 

(I903)- 

CRISES  :  E.  D.  Jones,  Economic  Crises  (1900) ;  T.  E.  Burton,  Finan- 
cial Crises  (1902);  Clement  Juglar,  A  Brief  History  of  Panics  in  the 
United  States  (trans,  by  Thomm,  1893) ;  M.  von  Tugan-Baranowsky,  Stu- 
dien  znr  Theorie  und  Geschichte  der  Handelskrisen  in  England  (1901) ;  brief 
historical  details  of  American  crises  in  D.  R.  Dewey,  Financial  History 
of  the  United  States  (Am.  Citizen  Series),  passim. 

194.  The  Nature  of  Credit. 

Credit  is  an  exchange  or  transaction  which  consists  in  the 
temporary  transfer  of  the  usance  of  wealth.  The  wealth  may 
be  composed  of  concrete  goods,  of  a  fund  of  capital  or  of  a 
mere  right  or  privilege.  The  pivotal  point  is  the  temporary 
character  of  the  alienation. 

We  must  be  careful  not  to  confuse  the  legal  with  the  economic 
conception.  Legally,  if  we  part  with  the  ownership  of  anything, 
it  is  a  sale ;  if  we  part  with  the  possession  while  retaining  the 

469 


47°  Credit.  [§  194 

ownership,  it  is  a  loan.  Economically,  the  essence  of  credit  is 
the  temporary  usance  of  wealth.  All  credit  is  really  loan  credit. 
A  sale  on  credit  is,  from  the  economic  point  of  view,  no  sale  at 
all.  Legally,  the  ownership  is  transferred  and  the  payment  is 
deferred ;  economically,  it  is  a  grant  to  the  purchaser  of  the 
privilege  to  utilize  the  commodity  subject  to  the  prior  economic 
rights  of  the  seller.  The  economic  alienation  does  not  become 
complete  until  the  payment  is  effected,  that  is,  until  the  credit 
expires.  In  the  interval  there  is  a  temporary  usance. 

From  this  fundamental  fact  flow  two  consequences  :  (i)  Since 
the  transfer  is  temporary,  it  must  terminate  at  a  future  date. 
The  loan  must  be  repaid,  and  if  in  the  meantime  the  sub- 
ject of  the  loan  has  disappeared,  its  economic  equivalent  must 
be  returned.  The  understanding  that  a  payment  is  to  be 
made  in  the  future  in  return  for  something  that  is  done  at 
present  is  of  the  essence  of  credit.  All  credit  is  virtually 
a  contract  for  the  future  delivery  of  money  or  money's  worth. 
(2)  The  lender  must  trust  the  ability  of  the  borrower  to  meet 
his  obligation  at  the  stipulated  date.  He  must  believe,  or 
have  credit,  in  him.  All  credit  rests  on  confidence,  —  a  con- 
fidence which  runs  through  the  whole  gamut  of  risk.  If  a 
merchant  "  opens  a  line  of  credit "  with  a  customer,  his  sole 
security  may  be  the  naked  expectation  that  the  bill  will  finally 
be  paid.  If  an  investor  parts  with  his  money  to  a  corporation 
in  return  for  a  bond,  his  security  consists  in  the  ultimate  right 
of  foreclosing  the  mortgage.  If  a  banker  lends  capital,  he  may 
demand  the  deposit  of  "  collateral,"  that  is,  securities  whose 
market  value  may  considerably  exceed  the  amount  of  the  loan. 

The  essence  of  credit,  then,  is  the  right  of  enjoying  some- 
thing the  ultimate  economic  title  to  which  belongs  to  another. 
According  to  the  use  made  of  the  enjoyment  we  distinguish  be- 
tween consumption  and  production  credit.  If  we  borrow  money 
from  a  friend  or  pawn  a  watch  in  order  to  buy  a  meal,  the 
credit  is  for  purposes  of  consumption.  If  we  borrow  funds  to 
increase  our  business,  the  credit  is  for  purposes  of  production. 


§  194]  Nature  of  Credit.  471 

With  the  advent  of  modern  economic  conditions  credit  has 
become  to  an  overwhelming  degree  productive  credit.  This 
explains  its  advantages  and  its  dangers  alike.  If  the  goods, 
capital  or  privileges  are  so  utilized  by  the  borrower  as  to  yield  a 
surplus  over  and  above  that  part  of  the  produce  requisite  to  pay 
for  the  use  of  the  loan,  credit  performs  the  function  of  capital 
and  may  be  deemed  equivalent  to  an  increase  of  capital.  In 
that  sense  credit  might  be  called  auxiliary  capital.  It  does 
the  work  of  capital  because  it  tends  to  increase  the  productive 
forces  of  the  community.  By  this  is  not  meant  that  credit  is 
actually  capital,  for  if  the  capital  is  in  the  hands  of  the  bor- 
rower, it  is  withdrawn  from  those  of  the  lender.  In  the  hands 
of  the  borrower,  however,  the  capital  does  more  good  than  in 
those  of  the  lender,  for  otherwise  it  would  not  be  transferred. 
To  the  lender  the  capital  is,  so  to  speak,  passive ;  to  the  bor- 
rower, active.  To  the  extent  that  credit  puts  capital  where 
it  is  more  productive  than  it  would  otherwise  be,  it  is  equiva- 
lent to  an  increase,  or  at  all  events  to  an  increased  usefulness, 
of  capital. 

On  the  other  hand,  if  the  funds  secured  through  credit  are 
unwisely  utilized  or  dissipated,  they  diminish  the  productive 
forces  of  the  community,  because  the  debtor  not  only  wastes 
his  own  efforts,  but  is  unable  to  replace  the  borrowed  capital. 
Owing  to  the  facility  with  which  modern  credit  can  be  obtained, 
it  is  peculiarly  susceptible  of  abuse.  If  a  man  has  to  create  or 
to  accumulate  capital,  he  will  be  moderately  careful  in  its  em- 
ployment ;  if  he  secures  it  on  credit,  he  is  more  apt  to  take 
chances.  He  is  relieved  from  immediate  cares,  and  is  likely  to 
paint  the  future  in  roseate  hues.  Inasmuch  as  credit  rests  on 
confidence,  it  is  human  nature,  in  dealing  with  the  property  of 
another,  to  have  a  misplaced  confidence  in  one's  self. 

Credit,  like  capital,  may  be  classified  into  commercial,  indus- 
trial, agricultural  and  financial  credit.  In  the  broader  sense  all 
credit  is  financial,  because  money  or  money's  worth  must  be 
repaid.  So-called  commercial  credit  takes  the  form  of  book 


472  Credit.  [§  195 

accounts,  promissory  notes  and  certificates  such  as  dock  warrants, 
grain  and  cotton  notes  and  warehouse  receipts.  The  instru- 
ments for  collecting  the  accounts  are  known  as  accounts  stated, 
accounts  settled,  due  bills,  commercial  drafts  and  bills  of  ex- 
change —  both  sight  and  time  bills.  Industrial  credit  comprises 
those  forms  connected  with-  corporate  industry  such  as  the 
various  kinds  of  stock  and  bonds  which  represent  contingent 
rather  than  actual  proprietorship.  Agricultural  credit  includes 
advances  made  in  connection  with  agriculture.  Financial 
credit  in  the  narrower  sense  is  primarily  bank  credit.  The 
bank  lends  its  credit,  that  is,  sells  a  contract  for  the  future  de- 
livery of  money  in  the  form  of  bank  notes  or  deposits,  while 
the  instruments  for  transferring  the  funds  are  chiefly  checks 
and  drafts.  Commercial,  industrial  and  agricultural  credit  all 
finally  converge  here,  for  the  bank  is  the  lender  par  excellence. 
Since  modern  credit  operations  centre  in  the  bank,  the  study 
of  credit  is  in  large  measure  the  study  of  banking. 

195.   Credit  and  Banking. 

The  function  of  a  bank  is  to  render  credit  mobile.  This  is 
accomplished  by  the  threefold  operation  of  discount,  deposit 
and  issue. 

(i)  A  business  man  finds  that  in  order  to  meet  some  past  or 
future  obligation  he  needs  funds,  consisting  not  necessarily  of 
money,  but  of  any  customary  means  of  payment.  If  he  has 
sold  goods  on  credit,  he  usually  receives  a  promissory  note  con- 
sisting, according  to  the  number  of  indorsements,  of  single  or 
double  name  paper.  In  case  of  a  future  rather  than  a  past 
transaction,  the  note  is  called  accommodation  paper.  If  the 
note  is  considered  good,  the  bank  will  give  him,  in  cash  or  in  an 
equivalent  right  to  demand  payment,  a  sum  equal  to  the  face 
value  of  the  note  less  the  interest  during  the  time  that  the  note 
has  to  run.  This  deduction  involves  a  discount,  and  to  discount 
a  note  thus  means  to  pay  its  face  value  less  the  interest  still  to 
accrue.  Legally,  the  transaction  is  a  sale  or  exchange  of  rights : 


§  195]  Credit  and  Banking.  473 

the  bank  buys  the  note  or  right  to  demand  payment  from  the 
maker,  and  sells  to  the  merchant  the  right  to  demand  payment 
from  it.  Economically,  the  transaction  is  a  loan,  because  the 
bank  virtually  lends  to  the  merchant  the  use  of  the  capital  repre- 
sented by  the  note  (less  the  discount).  The  borrower,  in  lieu 
of  presenting  some  other  man's  promissory  note,  may  offer  either 
his  own  note,  sometimes  accompanied  by  collateral  security, 
or  some  other  form  of  negotiable  paper  mentioned  in  the  last 
section.  The  bills  receivable  or  other  paper  thus  acquired  by 
the  bank  figure  among  its  resources  as  loans  or  discounts.  They 
form  a  part  of  its  assets. 

(2)  The  question  now  arises  as  to  the  shape  in  which  the 
bank  lends  its  credit.  When  a  bank  discounts  commercial  paper, 
it  may,  instead  of  paying  money  which  the  merchant  probably  does 
not  want,  place  an  equivalent  sum  to  his  credit.  In  other  words, 
it  may  open  in  his  name  an  account  or  deposit  which  can  be 
drawn  out  on  demand  by  check.  This  deposit  then  becomes 
a  liability  of  the  bank.  Deposits  and  discounts  thus  figure  on 
opposite  sides  of  the  balance  sheet. 

A  deposit  may  also  arise  without  any  discount,  as  when  one 
hands  to  a  bank  a  sum  of  money  or  its  equivalent,  receiving  in 
return  a  right  to  draw  on  the  bank  to  this  extent.  Legally  a 
deposit  is  therefore  a  sale  of  money  or  money's  worth  in  ex- 
change for  a  right  to  demand  a  corresponding  sum.  In  the 
case  of  a  special  deposit,  as  when  a  particular  object  is  de- 
posited in  the  vaults  of  the  bank  for  safekeeping,  the  trans- 
action is  legally  as  well  as  economically  a  loan,  because  the 
identical  thing  must  be  returned.  This  is,  however,  more 
properly  a  storage  warehouse  than  a  banking  business. 

When  a  deposit  arises  without  any  discount,  it  is  a  deposit  of 
money  in  lieu  of  a  deposit  of  bank  credit.  This  was,  in  fact,  the 
original  function  of  a  bank,  and  some  important  institutions,  like 
the  Bank  of  Amsterdam,  were  banks  of  deposit  without  being 
banks  of  discount.  Nowadays,  however,  the  deposits  in  the 
shape  of  bank  credit  far  transcend  in  amount  the  cash  deposits. 


474  Credit.  [§  195 

In  the  large  cities  of  Europe  and  America,  where  the  universal 
employment  of  checks  results  in  mutual  claims  of  the  various 
banks  on  one  another,  we  find  a  clearing-house,  in  which  the 
reciprocal  claims  are  adjusted  or  "cleared,"  with  a  payment 
only  of  the  uncancelled  balances.  In  1904  the  volume  of  ex- 
changes in  the  ninety-eight  clearing-houses  of  the  United  States 
amounted  to  the  prodigious  figure  of  $102,150,313,982,  over 
one-half  of  which  was  recorded  in  New  York  alone.  The  pay- 
ment of  cash  balances  between  the  New  York  banks  was  only 
5.2  per  cent  of  the  aggregate  clearings. 

(3)  Sometimes  the  borrower  who  presents  the  note  for  dis- 
count elects  to  receive  money.  In  place  of  giving  coin  or  gov- 
ernment paper,  the  bank  may  prefer  to  issue  its  own  promissory 
notes.  These  bank  notes  enter  circulation  in  convenient  de- 
nominations, and  form  a  part  of  the  currency.  As  such  they 
will  receive  attention  in  §  197.  The  point  to  be  emphasized 
here  is  that  so  far  as  the  bank  and  the  borrowers  are  concerned, 
the  economic  essence  of  the  bank  note  is  identical  with  that  of 
deposits.  Both  are  bank  liabilities,  because  the  bank  must 
ultimately  pay  its  note  or  honor  a  requisition  on  the  deposit ; 
both  involve  the  granting  of  credit  to  the  borrower  who  acquires 
the  right  to  demand  payment  of  a  given  sum  from  the  bank. 
The  function  of  issue  differs  in  form,  but  not  in  substance,  from 
that  of  deposit.  Bank  notes,  therefore,  as  well  as  deposits  are 
liabilities  of  the  bank  in  contrast  to  discounts,  which  are  assets. 

Every  bank  needs  a  certain  amount  of  capital  to  inspire  confi- 
dence. The  capital  figures  on  its  books  as  a  liability  to  the  share- 
holders, while  the  deposits  and  bank  notes  are  liabilities  to  the 
customers.  The  profits  of  a  bank  are  derived  from  the  fact  that 
it  secures  without  interest  the  use  of  the  additional  capital  repre- 
sented by  the  bank  notes  or  deposits,  and  that  it  can  safely  loan 
on  interest  or  invest  a  part  of  this  capital  in  lucrative  enterprises.1 

1  Strictly  speaking,  the  bank  makes  a  slight  extra  profit  through  the 
technical  discount  itself.  If  a  note  for  $10,000  at  six  per  cent  has  thirty 
days  to  run,  the  bank  will  deduct  $50  and  credit  $9,950.  The  present 


§  195]  Credit  and  Banking.  475 

The  benefit  of  the  borrower  consists  in  using  the  bank's  credit 
in  lieu  of  his  own  capital.  Banks  fulfil  their  true  function  when 
they  extend  to  their  customers  the  utmost  possible  credit  com- 
patible with  solvency.  If  they  are  reckless  in  their  discounts,  if 
they  accept  dubious  paper  and  thus  impair  their  assets,  if  they 
unduly  extend  their  deposits  or  unwisely  enlarge  their  note  issue 
and  thus  swell  their  liabilities,  they  rrfay  find  themselves  unable 
to  meet  the  maturing  claims.  In  old  and  conservative  com- 
munities, banks  may  sometimes  be  relied  on  voluntarily  to  keep 
in  cash  an  adequate  reserve  against  their  liabilities ;  in  most 
places,  even  if  it  is  not  true  that  "  free  trade  in  banking  is  free 
trade  in  swindling,"  experience  has  shown  the  need  of  some 
governmental  supervision. 

So  far  as  the  reserve  against  deposits  is  concerned  in  the 
United  States,  the  national  banks  in  the  reserve  cities  are  re- 
quired to  keep  as  a  reserve  at  least  25  per  cent  of  the  deposits  ; 
in  the  other  cities  at  least  15  per  cent.  The  reserve  must  con- 
sist of  "lawful  money,"  i.  e.  specie  or  government  legal  tender. 
But  clearing-house  certificates  and  the  cash  reserve  of  5  per 
cent  of  the  note  circulation  kept  in  the  United  States  treasury 
may  be  counted  as  a  part  of  the  reserve  against  deposits.  More- 
over, one-half  of  the  reserve  of  any  "  reserve  city  "  bank  or  three- 
fifths  of  that  of  any  other  bank  may  consist  of  cash  deposits  in 
any  central  reserve  city  bank.  The  central  reserve  cities  are 
New  York,  Chicago  and  St.  Louis.  The  reserve  cities  are 
twenty-eight  in  number.  The  events  of  the  last  few  decades 
have  shown  that  it  is  in  large  measure  at  this  very  point  that 
the  National  Bank  Act  needs  strengthening  in  order  to  insure 
sound  banking.  The  question  of  reserve  against  note  issues  will 
be  treated  in  §  197. 

Where,  as  in  the  United  States,  there  are  many,  small  banks 
instead  of  one  large  one,  the  banks  in  sudden  emergencies 

worth  of  $10,000,  however,  is  24-^  cents  more  than  that ;  that  is,  $9,950.24-! 
at  six  per  cent  for  thirty  days  equals  $10,000.  This  difference  accrues 
to  the  bank. 


476  Credit.  [§  196 

sometimes  co-operate,  and  seek  to  protect  their  depositors  by 
the  system  of  combined  reserves,  through  the  issue  of  clearing- 
house certificates.  In  all  cases,  however,  the  solvency  of  a 
bank  is  far  more  than  a  matter  of  concern  merely  to  the  share- 
holders and  the  immediate  customers.  The  modern  bank  is,  so 
to  speak,  the  nerve  centre  of  the  business  world.  A  shock  to 
its  credit  at  once  ramifies  throughout  the  community,  and  its 
failure  may  paralyze  enterprises  that  seem  to  be  only  remotely 
connected  with  the  particular  interests  involved.  The  problem 
of  bank  reserves  is  the  one  of  central  importance  in  the  subject 
of  credit. 

196.   Credit  and  Prices. 

It  is  from  this  point  of  view,  therefore,  that  we  must  approach 
the  question  of  the  influence  of  credit  upon  prices.  Some 
writers,  like  Mill,  assert  that  since  credit  virtually  means  purchas- 
ing power,  credit  acts  on  prices  exactly  as  money  does.  On  the 
exchanges  cotton  and  wheat  futures  are  no  less  instrumental  in 
fixing  prices  than  cash  sales.  So  here,  instead  of  transacting 
business  with  "  spot  gold,"  "  gold- futures  "  or  credit  are  used. 
The  greater  the  use  of  credit,  the  larger  the  number  of  purchases 
and  therefore  the  higher  will  be  the  level  of  prices. 

This  theory"  of  the  substantial  identity  of  credit  and  money, 
as  purchasing  power,  overlooks  the  fact  that  in  a  credit  opera- 
tion only  one-half  of  the  transaction  takes  place  now.  Where 
money  is  used  the  transaction  is  completed  at  once,  —  money 
and  commodities  change  hands;  where  credit  is  used,  the  com- 
modity changes  hands  now,  but  the  debt  incurred  must  be  paid 
in  the  future.  In  other  words,  it  is  a  question  not  simply  of 
purchasing  power,  but  of  liquidating  power.  This  considera- 
tion has  led  writers  like  Walker  to  assert  that  credit  has  no  in- 
• 

fluence  at  all  on  prices,  because  the  debts  created  by  such  a 
transaction  are  ultimately  cancelled  by  the  credits. 

The  truth  lies  midway  between  these  two  positions.  If  all 
credit  operations  were  absolutely  automatic,  and  if  confidence  in 


§  196]  Credit  and  Prices.  477 

ultimate  payment  were  so  complete  that  actual  money  were  never 
demanded,  credit  would  be  a  perfect  substitute  for  money,  and 
influence  prices  just  as  money  does.  In  point  of  fact,  how- 
ever, confidence  is  never  so  complete.  The  banks  must  always 
keep  a  certain  amount  of  money  on  hand  to  meet  possible  de- 
mands. The  debts,  in  other  words,  are  never  entirely  cancelled 
by  the  credits  because,  as  the  future  ripens  into  the  present, 
the  conditions  of  the  market  change.  There  will  always  have 
to  be  a  certain  balance  which  a  prudent  bank  must  retain. 
This  balance  measures  the  real  influence  of  credit  on  prices. 
It  is  quite  true  that  credit  is  purchasing  power  and  thus 
tends  to  raise  prices ;  but  credit  is  not  to  the  same  extent 
liquidating  power.  In  order  to  serve  as  a  basis  for  the  credit 
operations  a  certain  quantity  of  coin  must  be  impounded  as  a 
reserve.  Thus  the  medium  of  the  entire  transaction  is  in  the 
broad  sense  the  credit  less  the  reserve  :  as  purchasing  power 
the  credit  alone  operates,  as  liquidating  power  the  credit  must 
be  supplemented  by  the  reserve.  Since  the  money  so  reserved 
is  subtracted  from  what  would  otherwise  enter  circulation,  there 
is  less  money  disposable  for  actual  cash  transactions,  or,  in  other 
words,  the  price  level  is  lower  than  it  would  otherwise  be.  The 
credit  thus  tends  to  raise  prices,  the  reserve  to  lower  prices. 
The  reserve,  however,  is  always  much  smaller  than  the  credit 
transactions,  for  there  would  otherwise  be  no  advantage  in  using 
credit.  The  net  result,  therefore,  is  that  credit  raises  prices  to 
a  certain  point. 

Credit,  in  other  words,  although  it  exerts  by  no  means  the 
same  amount  of  influence  on  price  that  money  does,  exerts 
the  same  kind  of  influence.  The  reason  that  it  does  not  exert 
the  same  amount  of  influence  is  that  a  portion  of  its  ideal 
efficacy  as  a  substitute  for  money  is  lost  through  the  necessity 
of  keeping  on  hand  a  reserve  for  which  no  substitute  can  be 
employed.  The  extent  of  this  reserve  is  a  measure  of  the  in- 
completeness of  the  substitution,  and  therefore  of  the  degree  to 
which  credit  fails  to  equal  money  in  affecting  price.  The  differ- 


478  Credit.  [§  197 

ence  between  a  "  wheat-future  "  and  a  creditor  a  "gold-future  " 
is  that  a  reserve  is  unnecessary  in  the  one  case,  but  requisite  in 
the  other. 

This  also  serves  to  explain  why  credit  cannot  increase  prices 
indefinitely.  It  is  indeed  true  that  an  enhanced  use  of  credit 
marks  a  period  of  rising  prices.  It  is  precisely  in  such  times, 
however,  that  prudent  bankers  will  be  solicitous  about  their  re- 
serves and  make  every  effort  either  to  increase  their  reserves 
or  to  diminish  their  loans.  Money  becomes  "  tight,"  the  rate 
Of  discount  rises  and  the  increase  of  price  tends  to  arrest  itself. 
A  speculative  mania  may  indeed  supervene,  and  prudence  for 
a  time  be  cast  to  the  winds,  with  a  dangerous  discrepancy 
between  bank  liabilities  and  quick  assets.  This  will,  however, 
lead  to  a  crisis,  to  be  discussed  in  §  198  ;  and  when  the  bubble 
of  inflated  values  is  inevitably  pricked,  the  price  level  will  again 
fall.  All  prices  must  finally  be  reduced  to  the  basis  of  metallic 
money,  and  with  a  given  quantity  of  money  the  oscillations  in 
the  price  level,  so  far  as  the  effect  of  credit  is  concerned,  depend 
on  the  proportion  between  the  money  in  circulation  and  that 
used  as  a  reserve  for  credit  transactions. 

197.  Credit  and  Currency. 

We  have  seen  (§  188)  that  all  non-metallic  money  is  of  three 
kinds :  representative,  fiat  and  bank  money.  From  another 
point  of  view  it  may  be  classified  as  government  and  bank  money, 
each  again  divisible  into  convertible  and  inconvertible  currency 
(although  in  the  case  of  government  money  the  terms  redeemable 
and  irredeemable  paper  are  customary).  In  Europe  almost  the 
entire  paper  circulation  is  composed  of  bank  notes ;  in  the 
United  States,  as  a  result  partly  of  accident,  partly  of  the  silver 
movement  at  the  close  of  the  nineteenth  century,  partly  of 
a  certain  ungrounded  suspicion  on  the  part  of  the  public 
toward  the  national  banks,  over  three-fourths  of  the  circulation 
consists  of  government  currency.  This  comprises  three  classes  : 
(i)  the  United  States  notes,  or  greenbacks,  dating  from  the 


BANK-NOTES,   PAPER  MONEY,  GOLD 

AND  TOTAL  MONETARY  CIRCULATION 

IN  THE  U.S.  FROM  1878  TO  1905. 


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§  197]  Credit  and  Currency.  479 

civil  war,  and  legal  tender  for  all  debts  except  customs  duties 
and  interest  on  the  debt  and  redeemable  in  coin  since  1879; 
(2)  gold  certificates  issued  upon  deposit  of  gold  coin  or  bullion, 
not  legal  tender,  but  receivable  for  customs,  taxes  and  all  public 
dues;  and  (3)  silver  certificates  issued  in  return  for  silver 
dollars  and  likewise  not  legal  tender.  The  treasury  notes  of 
1890,  as  stated  on  page  453,  have  now  almost  disappeared.  On 
July  i,  1905,  the  government  notes  in  existence  amounted  to 
1,340,  the  bank  notes  to  498,  millions  of  dollars.  On  the 
table  on  pages  480-481  will  be  found  a  comparative  statement 
of  the  paper  circulation  of  the  United  States  from  1860,  and  in 
the  chart  opposite  page  478  will  be  found  the  details  of  the 
bank  note,  paper  money  and  total  monetary  circulation  since 
1878. 

The  great  advantage  of  a  carefully  guarded  government  cur- 
rency is  absolute  security.  The  convertibility  of  all  the  United 
States  issues,  for  instance,  is  now  insured  by  law.  The  act  of 
1900  imposes  on  the  Secretary  of  the  Treasury  the  obligation 
to  maintain  all  other  forms  of  money  at  parity  with  gold,  and 
to  this  end  assigns  for  such  redemption  purposes  a  special 
reserve  fund  of  150  million  dollars  of  gold,  to  be  replenished 
in  case  of  need  by  sale  of  bonds.  On  the  other  hand,  the  disad- 
vantage of  government  paper  is  a  certain  rigidity  or  incapacity 
of  such  circulating  medium  to  adjust  itself  automatically  to  the 
varying  needs  of  the  business  community.  It  is  to  bring  about 
the  desired  elasticity  that  recourse  is  usually  taken  to  bank 
currency. 

Bank  currency,  as  we  have  seen,  is  of  two  kinds,  deposit 
currency  (in  the  shape  of  checks)  and  note  currency.  The 
former  is  by  all  means  the  more  important.  In  the  United  States 
national  bank  deposits  are  ten  times  as  large  as  the  note  circu- 
lation. In  fact,  in  the  larger  cities  the  banks  usually  issue  no 
notes  at  all.  Checks  are,  however,  commonly  presented  for 
payment  after  a  very  few  transfers.  Even  though  they  are  now 
extensively  used  in  America  for  retail  transactions,  bank  notes 


480 


Credit. 


[§  197 


H  U 


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HO 

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1 

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Si 

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Cfl-0  £ 

153 

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«s "" 

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"•*  O  "^"CO  *o  IM  to  CJ  ^o  r^co  OO  X^  ^*-  O  c^  O  O  t^\O  xo  10  CO  •^~ 
M  cTco  ^*  *o  o"  "^c^T^O  ^o  cs  HI  N  "^-O  CO  O  f^  G^  to  10  ^  C^  C*T 
•^-  to  w»  t^  O  t^  to  csl"*|-(CS^"vOf>*OO  C^O  CO  COCO  T}-  O  r^. 

^tovoi-  ^°':-?^^ 

txt^CNtOtxvOTt-NCO  O  M  -3-toO  M  C\O  «  C^tOfOw  O  t^ 
t^\O  txCO  \O  to  to -4  r^iO  vO  t^O  —  CO  O  to  -»f  \O  w  •*  O  to  C^ 
•^r^-O  M  O  t^NO  io—  •»j«  too  r^  to  to  to  O  t^  -^-O  O  c^ 

Sto  cs  tCco  c^  t^  o**  to  i-Tco  cT  t-T  to  --^  to  ^^o^  to  cTvo"  to  to  •i^' 
o  iovo  oo  cs  cs  o  to  u-iO  p*  cs  *rj-  cs  r^vo  —  •*$•  t^co  cs  cs  to 
"t  O_  -^00^  to  —_  to  cs^  to  tooo^c<o^  t^;'<;tO1fl0l,cvJvt^;r2l^,t^'^;ri 
f"^  cT  to  ON  O^  to  C\  to  M  O*  tC^O^  t-C  CT^  ***  toO<r  tC  rxvo"  ***  ***  f~i  cT 
O  O  fO  tt-CO  -«}-CS  O  OCNO-  to  -^-CO  1^  to  OCO  1^  O\  O  O  O 
CS  CS  fOvO  O  tx  t^.  t^\O  vO  vO  t^  t^  t^  t^  tv.  I^vO  vO  v£)  vO  t^  t^  t^ 

§000000000000000  -^-O  i^co  •*  cs  ooo 
OOOOOOOOOOOOOOO^^*  to  ON  —  CC  VO  CO    O 

ioO~ioioioiototoioioi/iiotoiriioiocTiorrr-C'«t-rCfOc£ 
fOiocsCSNCSMCSCSCSCSCSCSCSMM  uo\O  O  «o  C^  rj-  O  O 
CS  CS  >-i  to  -^-vO  t^  t^. 

O  w  cs  to  •>*•  too  r^oo  o^  o  «  <s  to  •<*•  too  t^oo  ^  o  >-  cs  to 
oooo^cvCsCOO-o  i^i^t^t^t^r^r^i-^t^  r^.x;  ~sj  <~jz  '-r> 

COCOCOCOOOCOOOOOCOCOCOCOCOOOCOOOCOCOCOOOCOCOCOCX3 


§  197] 


Credit  and  Currency. 


481 


N    co  M    C<1    CS    N    CNl    CO  ^  ""  ^t"  co  M    (Nl    to  tovO   tx 
NWNNNNNNNNNCSNCSWNNN 


tx.oO   ON  O 


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oooo 

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O  fi  •*•  -**-NO    O  NO    CO  ON  to  M 


t-i  CO  M*  O  ^  ON 
_  •<+•  O  CO  t^CO 
CN  •-<  rf-  NO  ON  C-i  O  ON  w  -ft^O  CO  1^  O_  •<£  ' 


f  10  10  co 
«  N  -^- 
o  i/->>-, 


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l^O    ,D^-^t-0    OvO    fOO    "/It^uiO 
-H    ro  M    -^-  to  r^CO    ON  -^-  CS  oo          >-    ro 


O\  C 

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ON  CO  ^-  w  O  ^-00  r^  O  t^  "-  NO  O  ON  ONOO  CO  ^  ~  -•  M" 
co  N  O  O  ON  CO  co  CONO  m  -^-  O  ONOO  NO  CO  «  t^  to  M  M 
ONOO  CO  ONNO  -^Nq^NO  M  COr>.i-^i-i  N  C^r>fi,l^.lOCOCi. 

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^2  «  « 


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^  ^ 


482  Credit.  [§  197 

are  obviously  more  convenient  for  ordinary  circulation  and 
especially  for  small  sums. 

Since,  therefore,  in  most  countries  bank  notes  are  preferred  to 
government  notes,  the  regulation  of  note  issue  has  aroused  much 
discussion.  There  have  been  two  theories,  known  respectively 
as  the  currency  and  the  banking  principle.  The  currency 
principle  states  that  whereas  in  the  case  of  a  metallic  currency 
all  the  specie  cannot  be  exported,  for  the  reason  that,  as  the  coin 
goes  out,  prices  will  fall,  exports,  increase  and  money  again  flow 
in,  on  the  other  hand  an  issue  of  bank  notes  may  expel  the 
specie  because  the  total  volume  of  money,  now  composed  of  coin 
and  notes,  will  be  at  least  no  smaller  than  before.  On  the  con- 
trary, the  banks,  it  is  alleged,  will  put  into  circulation  more  notes 
than  the  specie  displaced,  and  there  will  soon  be  a  premium  on 
gold.  Hence,  to  prevent  the  notes  from  becoming  redundant 
and  thus  ultimately  inconvertible,  safeguards  must  be  adopted 
against  overissue. 

The  weakness  of  this  reasoning  lies  chiefly  in  overlooking  the 
fact  that  bank  deposits  act  precisely  like  bank  notes.  The  ad- 
vocates of  the  banking  principle  pointed  out  that  if  the  banks 
could  affect  prices  and  the  stock  of  coin  by  increasing  their, 
note  issue,  they  could  do  the  same  by  expanding  their  deposits. 
A  restriction  on  note  issue  would  therefore  in  itself  be  futile. 
In  point  of  fact  the  banking  theorists  denied  that  inflation  was 
possible  in  either  case,  since  both  notes  and  deposits  are  issued 
in  response  to  an  actual  demand.  As  long  as  bank  paper  is 
convertible,  they  claimed  that  there  can  be  no  redundancy,  be- 
cause if  there  were  an  overissue,  that  is,  an  issue  greater  than  the 
real  demand,  the  notes  would  at  once  automatically  return  to 
the  bank.  Hence,  so  long  as  the  ordinary  principles  of  good 
banking  are  observed,  no  safeguards  are  needed. 

The  truth  again  lies  in  the  middle.  The  banking  theory  was 
undoubtedly  correct  in  emphasizing  the  analogy  between  notes 
and  deposits,  and  in  stating  that  the  aggregate  of  currency  is  not 
likely  to  be  permanently  increased  by  an  issue  of  notes.  It 


§  197]  Credit  and  Currency.  483 

failed,  however,  to  observe  that  as  the  bank  notes  are  returned 
to  the  bank,  specie  may  be  paid  out  in  exchange,  and  that 
while  the  aggregate  circulation  may  remain  the  same,  its  pro- 
portions may  be  altered.  Even  though  the  redundant  notes 
automatically  return  to  the  bank,  it  is  precisely  this  return  which 
may  exhaust  the  coin  reserve  and  thus  jeopardize  the  entire 
issue.  From  the  point  of  view  of  bank  solvency  a  perilous  dis- 
crepancy between  reserve  and  liabilities  may  be  brought  about 
by  a  diminution  of  the  reserve  as  well  as  by  an  increase  of  the 
liabilities. 

As  a  consequence,  all  nations  impose  some  restrictions  on 
bank  issues.  These  are  of  four  chief  kinds:  the  maximum 
amount,  the  definite  reserve,  the  bond  deposit  and  the  safety 
fund  method.1 

(1)  A  good  example  of  the  first  method  is  that  employed 
by  France.     The   only  limitation    placed    upon   the    Bank   of 
France  is  the  fixing  of  the  note  issue  at  a  maximum  which  since 
1893  has  been  put  at  four  thousand  million  francs.    This  method, 
however,  reverses  the  true  principle,  restricting  what  should  be 
left  free  and  leaving  free  what  should  be  restricted.     As  long  as 
the  reserve  increases  with  the  note  issue,  there  is  no  reason  why 
an  absolute  maximum  should  be  established. 

(2)  The  control  of  the  reserve  may  be  brought  about  by  the 
provision  for  a  fixed  or  a  variable  percentage.     The  fixed  per- 
centage is  typified  in  the  Swiss  banks  and  in  the  Bank  of  the 
Netherlands,  where  the  specie  reserve  is  placed  at  forty  per 
cent.     In  the  latter  case,  however,  the  reserve  applies  to  de- 
posits as  well  as  to  notes.     The  variable  percentage  is  illustrated 
in  Great  Britain  and  Germany.      According  to  Peel's  Act  of 

1  Jevons,  Money,  218-235,  mentions  fifteen  different  methods:  the 
simple  deposit,  the  partial  deposit,  the  minimum  reserve,  the  proportional 
reserve,  the  maximum  issue,  the  elastic  limit,  the  documentary  reserve,  the 
real  property  reserve,  the  foreign  exchanges,  the  free  issue,  the  gold  par, 
the  revenue  payments,  the  deferred  convertibility  and  the  paper  money 
method.  They  may,  however,  be  substantially  reduced  to  those  men- 
tioned in  the  text. 


484  Credit.  [§  197 

1844  the  issue  of  uncovered  notes  by  the  Bank  of  England  is 
limited  to  fourteen  million  pounds.  -  For  each  additional  note 
there  must  be  kept  a  corresponding  amount  of  coin.  This  act 
has,  however,  been  suspended  several  times  in  periods  of  great 
crisis.  As  the  other  banks  of  England  and  Wales  abandon  or 
forfeit  their  old  right  to  issue  notes,  two-thirds  of  the  uncovered 
amount  authorized  accrue  to  the  Bank  of  England.  As  a  re- 
sult, the  authorized  uncovered  issue  of  the  bank  has  risen  to 
^"17,775,000.  The  country  banks'  issues  are  now  under  three 
millions;  that  of  the  Bank  of  England  about  sixty  millions  of 
pounds.  In  the  German  banks  the  uncovered  authorized 
issue  was  fixed  at  three  hundred  and  eighty-five  million  marks, 
with  an  obligation  similar  to  that  of  England,  but  with  these 
differences :  (a)  that  the  reserve  for  additional  notes  must 
be  one-third  in  coin  and  two-thirds  in  bills  of  exchange ;  and 
(b)  that  additional  notes  may  be  issued  without  any  cov- 
ering, but  subject  to  a  tax  of  five  per  cent.  This  provides 
for  a  certain  elasticity  lacking  in  the  English  law.  To  the 
Reichsbank  was  originally  (1875)  apportioned  two  hundred  and 
fifty  of  these  three  hundred  and  eighty-five  millions.  As  the 
other  banks  abandoned  their  right  of  issue,  that  of  the  Reichs- 
bank grew  until  in  1900  it  amounted  to  almost  three  hundred 
millions  of  marks. 

(3)  The  bond  deposit  system  is  that  of  the  United  States. 
Under  the  National  Banking  Act  of  1863,  in  this  respect  follow- 
ing the  principle  of  the  New  York  Free  Banking  Law  of  1838, 
the  national  banks,  which  by  the  operation  of  a  ten  per  cent 
tax  on  other  bank  notes  acquired  practically  the  sole  right  of 
note  issue,  are  required,  in  case  they  desire  to  issue  notes,  to 
deposit  with  the  Secretary  of  the  Treasury  government  bonds. 
Under  the  original  free  banking  system  the  circulation  might 
be  secured  by  the  deposit  of  real  estate  mortgages  as  well  as  of 
bonds.  In  return  the  national  banks  receive  the  right  to  issue 
notes  equal  in  amount  (since  1900)  to  the  par  value  of  the  bonds, 
but  not  exceeding  their  market  value  nor  the  capital  stock  of 


§  197]  Credit  and  Currency.  485 

the  bank.  Furthermore  each  bank  must  since  1874  keep  at  the 
treasury  a  sum  equal  to  five  per  cent  of  its  circulation,  to  form 
a  redemption  fund,  and  is  subject  to  a  tax  of  one-half  of  one 
per  cent  on  the  outstanding  issue.  This  system  affords  absolute 
ultimate  security  for  the  bank  notes,  but  does  not  provide  for 
sufficient  elasticity  nor  perhaps  for  immediate  convertibility.  A 
better  method  to  insure  such  immediate  convertibility  would  be 
the  provision,  as  in  the  case  of  the  "  Suffolk  Bank  System  "  in 
New  England  from  1819  to  1866,  that  no  bank  should  pay 
out  any  notes  except  its  own.  The  National  Bank  currency  is 
in  effect  paper  money  issued  by  the  government  through  the 
medium  of  the  banks. 

(4)  The  safety  fund  system  is  the  one  in  vogue  in  Canada 
and  formerly  found  in  parts  of  the  United  States.  It  originated 
in  New  York  in  1829.  Under  this  method  each  bank  con- 
tributes to  a  common  fund  a  certain  percentage  of  its  capital 
(in  Canada  five  per  cent)  which  is  to  be  applied  to  the 
redemption  of  the  notes  of  any  insolvent  bank.  It  is  a  kind  of 
mutual  insurance  system,  which  tends  to  provide  an  equally  safe 
currency  without  interfering  with  the  elasticity  of  the  circulation 
or  tying  up  the  capital  of  the  bank.  The  fund  of  three  per  cent 
formerly  required  in  New  York  was  until  1842  a  security  for 
deposits  as  well  as  for  notes,  and  accordingly  proved  to  be  inade- 
quate. On  the  table  on  the  next  page  will  be  found  the  chief 
statistics  which  illustrate  the  relation  of  reserve  to  notes  and 
deposits  in  the  principal  banks  of  the  world. 

In  the  United  States  the  whole  question  of  note  issue  is  be- 
coming of  secondary  importance.-  There  are  four  stages  in  the 
machinery  of  exchange :  barter,  commodity  money,  paper 
money  (bank  and  government  notes)  and  bank  credits  in  the 
shape  of  deposits.  In  the  American  commercial  centres  the 
demands  of  business  men  for  means  of  payment  are  satisfied 
to  an  overwhelming  extent  by  the  fourth  method,  and,  as  we 
have  seen,  even  in  the  case  of  paper  currency  government  notes 
constitute  over  three-quarters  of  the  entire  amount.  It  seems 


486 


Credit. 


[§  197 


probable  that  the  legitimate  demand  for  elasticity  will  be  met 
not  by  any  radical  change  in  the  system  of  bank  note  issue  such 
as  an  "  asset  currency  "  (that  is,  currency  secured  only  by  ordi- 
nary banking  assets),  but  by  an  improvement  in  the  methods  of 

CONDITION   OF   PRINCIPAL   BANKS   ON   JUNE   30,    1904, 
IN   MILLIONS    OF   DOLLARS. 


"5 

% 
u 

H3 

°o 

O 

b 
> 

CO 

Total  Specie. 

Circulation. 

Q 

Deposits  belonging 
to  Treasury. 

Loans. 

Bank  of  England 
Other  English  Banks 

70.8 
280.1 

170.5 

170.5 
7^2.4 

139-3 
"v° 

242.5 

2.Q74.2 

«., 

I75.I 

1,072  6 

Banks  of  Scotland 
German  Imperial 
Bank 

45-3 
28.0 

28.7 
2OQ.Q 

36.2 

•jc6.? 

5°5-i 

I-3Q.2 

341.2 

267   T, 

Other  German  Banks 

Tr  8 

Bank  of  France 
Imperial  Bank  of 
Russia 
Bank  of  Austria 
Hungary 
Banks  of  Canada 

35-2 
28.3 

41.9 
79-5 

Q4.  I 

535-9 
429.0 
229.6 

218.6 

43-2 
62.8 

754-5 
472.2 

292.4 
16.2 
IA-J  ji 

832.4 
347-5 

335-6 
60.2 

2-J   - 

132.0 
70-3 

3T-3 
475-3 

64.1 
158.0 
0.6 

246.9 

203.8 

I42.O 

508.7 

Banks  of  Central  and 
South  America 

128  6 

14.1  O2 

20  2 

United  States  : 
National  Banks 
State  Banks 

767.4 

625.1 

111.3 

29.7 

20.7 
10.6 

I32.I 

40-3 

449-2 

3.422.0 
6.688.0 

103.0 

3.62T.8 
4.360.2 

discount  and  by  some  provision  whereby  the  banks  may  supple- 
ment their  own  credit  by  that  of  the  government.  The  Payne- 
Aldrich  bills  of  1903,  for  instance,  permit  the  Secretary  of  the 
Treasury  to  receive  from  the  banks  as  security  for  deposits  their 
reserves  in  the  shape  of  government  and  carefully  selected  state, 
local  and  railroad  bonds. 

It   is   in   periods   of  crisis   that  elasticity   is   most  urgently 


1  Includes  specie,  bullion  and  cash  balances. 

2  Includes  specie,  bullion  and  paper  currency. 


§  198]  Credit  and  Crises.  487 

needed  ;  and  it  is  precisely  in  such  emergencies  that  the  banks 
can  advantageously  invoke  the  assistance  of  a  stable  and  solvent 
government.  It  is  a  significant  fact  that  in  a  country  proverbi- 
ally suspicious  of  state  interference,  the  government  should  be 
playing  a  constantly  enlarging  role  in  the  satisfaction  of  currency 
needs.  Through  government  notes  we  get  security,  through 
bank  deposits  we  obtain  credit  facility,  and  through  some  form 
of  closer  co-operation  between  the  banks  and  the  treasury  we 
shall  probably  secure  greater  elasticity.1 

198.     Credit  and  Crises. 

Crises  are  sometimes  classified  as  financial  and  commercial 
or  industrial  crises.  In  point  of  fact,  since  the  bank  is  the 
nerve  centre  of  modern  business,  all  crises  are  financial  crises. 
What  is  meant  by  the  alleged  distinction  is  that  in  some  cases 
attention  is  directed  to  the  immediate  occasion  of  the  crisis  in 
the  shape  of  bad  banking  or  bad  currency  or  stock  exchange 
speculation,  while  in  other  cases  regard  is  paid  to  the  under- 
lying cause  in  the  general  conditions  of  business. 

Crises  are  essentially  modern  phenomena.  They  are  a 
product  of  the  new  system  of  business  enterprise,  built  up  on 
capital  and  credit.  Sporadic  instances  are  found  in  earlier 
centuries,  but  it  is  only  since  the  domination  of  the  factory 
system  that  crises  have  become  a  regular  occurrence.  During 
the  nineteenth  century  a  certain  rough  periodicity  may  be  ob- 
served in  the  world  crises  transmitted  from  country  to  country. 
The  important  ones  were  those  of  1825,  1836-1839,  1847,  1857, 
1873,  1884,  1890,  1893  and  1900. 

The  surface  facts  of  the  phenomenon  are  familiar.  There  is 
a  rhythmic  movement  in  all  modern  business.  At  a  certain 
period  "  times  are  good,"  prices  rise,  all  manner  of  new  enter- 

1  The  danger  of  having  the  treasury  interfere  directly  with  the  money 
market  was  illustrated  in  the  crisis  of  1873.  The  idea  sketched  above 
rests  on  the  direct  initiative  of  the  banks,  supported,  however,  by  the 
power  and  credit  of  the  government. 


488  Credit.  [§  198 

prises  are  launched,  bank  facilities  are  extended,  and  prosperity 
is  found  on  every  side.  Then  in  the  height  of  this  period  of 
exaltation,  something  happens  to  disturb  confidence.  A  chance 
occurrence,  a  mere  rumor,  may  suffice.  Some  bank  or  financial 
institution  considers  its  credit  too  heavily  engaged  or  suspects 
that  the  collateral  deposited  with  it  for  loans  is  inadequate. 
Just  at  the  flood  of  the  tide,  when  new  demands  are  constantly 
being  made,  it  finds  itself  unable  or  unwilling  to  respond.  Its 
refusal  intensifies  the  feeling  of  insecurity,  and  with  the  inability 
of  some  important  concern  to  meet  its  obligations  a  failure 
occurs.  At  once  every  other  institution  takes  in  sail,  and  en- 
deavors to  realize  on  its  collateral;  that  is,  creditors  demand 
payment,  and  debtors  in  their  frantic  effort  to  pay  sacrifice 
securities,  often  in  vain.  Prices  fall  with  a  thud,  failure  suc- 
ceeds failure,  and  the  panic  is  complete,  carrying  in  its  wake 
loss  and  suffering  to  every  part  of  the  economic  community. 
Then  follows  a  period  of  more  or  less  long  continued  depres- 
sion, low  prices  and  "  hard  times "  with  chronic  unemploy- 
ment and  low  wages,  until  gradually  the  wave  of  prosperity 
again  sets  in,  and  the  process  repeats  itself. 

According  to  the  point  of  view  from  which  the  subject  is 
approached,  the  explanation  usually  given  is  that  of  overpro- 
duction or  underconsumption.  The  theory  of  overproduction 
states,  not  that  there  is  a  general  glut  of  commodities  — 
for  that  would  imply  that  there  can  be  too  much  wealth, 
which  is  absurd  —  but  that  there  are  more  goods  than  can 
be  sold  at  a  profitable  price.  Whether  this  overproduction 
starts  with  particular  commodities  and  becomes  relative  over- 
production or  extends  to  all  commodities  and  becomes  general 
overproduction  is  immaterial.  The  remedy  for  crises  then 
would  be  to  produce  less,  either  of  certain  things  or  of  all 
things.  On  the  other  hand,  the  theory  of  underconsumption 
emphasizes  the  inability  of  the  consumer  to  pay  enough  to 
keep  the  industries  going.  Were  the  consumer  to  save  less  and 
to  spend  more,  crises  might  be  averted. 


§  198]  Credit  and  Crises.  489 

The  true  explanation  of  crises  is  somewhat  different.  The 
whole  problem  is  one  of  capitalization.  All  investment  values 
are,  as  we  know  (§  117),  the  result  of  the  capitalization  of  esti- 
mated earnings.  The  factory  system  is  one  of  mass  production 
for  the  anticipated  market,  not  of  production  to  order  for  a 
given  market.  Even  if  it  be  said  that  modern  steel  mills  only 
fill  definite  orders,  it  is  none  the  less  true  that  immense  plants 
are  constantly  being  erected  in  the  expectation  that  orders  will 
come  in  in  the  future.  A  period  of  good  times  maybe  initiated 
by  large  orders  for  some  particular  business.  —  due,  for  instance, 
to  a  new  navy  programme,  to  internal  improvements,  to  a  war 
or  to  any  other  large  demand.  Prices  rise  in  that  business,  pro- 
duction increases,  the  movement  spreads  to  other  lines,  and  the 
new  enterprises  are  financed  by  loans  from  the  banks  or  by  the 
sale  of  securities  on  a  capitalization  proportionate  to  the  antici- 
pated earnings.  The  psychological  character  of  these  credit 
transactions  is  such,  as  we  have  seen,  that  the  capitalization  will 
inevitably  be  put  too  high.  The  hoped  for  earnings  do  not 
come  in  an  amount  sufficient  to  justify  the  investment.  It 
becomes  necessary  to  reduce  the  capitalization  to  its  true 
market  value  on  the  basis  of  actual  earnings.  This  process  of 
readjustment  of  overcapitalized  values  necessarily  involves  loss ; 
but  readjustment  there  must  be.  If  the  realization  of  its  neces- 
sity is  sudden,  we  have  a  crisis  or  panic ;  if  it  can  be  brought 
about  gradually,  we  have  a  process  of  liquidation.  In  any  event 
there  follows  a  period  of  depression,  which  must  continue  until 
the  readjustment  of  capitalization  to  actual  earning  capacity  has 
become  complete. 

Crises  therefore  are  not  necessarily  a  result  of  increased  tech- 
nical production.  The  important  point  is  not  production,  but 
capitalization.  The  crisis  of  1837  was  due  to  the  overcapitali- 
zation of  land  values  ;  the  liquidation  of  1903  to  the  over- 
capitalization of  trust  values.  In  neither  case  was  there  any 
increased  production.  Overproduction  may  indeed  accompany 
overcapitalization,  but  the  emphasis  is  to  be  put  on  the  discrep- 


490  Credit.  [§  198 

ancy  between  the  investment  and  the  returns.     In  this  sense 
all  crises  and  depressions  are  credit  phenomena. 

Inasmuch  as  modern  business  enterprise  is  based  on  credit, 
it  is  obvious  that  even  an  ideal  banking  and  currency  system 
cannot  in  itself  avert  crises.  It  may  mitigate  the  evils  by  pro- 
viding great  elasticity  and  preventing  the  shock  of  a  sudden 
panic  ;  but  the  ultimate  readjustment  must  come.  More,  how- 
ever, is  to  be  hoped  for  from  the  newer  tendencies  in  the  organi- 
zation of  economic  life.  With  the  growth  of  the  business  unit 
and  the  integration  of  modern  industry  it  is  possible  to  dis- 
cern the  beginnings  of  a  more  equable  and  better  regulated 
method  of  enterprise  and  capital  investment.  With  every  decade 
panics  are  visibly  becoming  less  severe.  Like  some  of  the  other 
economic  evils  of  the  nineteenth  century  discussed  in  the  pre- 
vious book,  financial  crises  seem  to  be  peculiar  to  the  infancy 
of  the  factory  system.  Here,  as  elsewhere,  the  task  of  the  future 
consists  in  retaining  the  advantages  of  a  healthy  competition 
while  doing  away  with  its  abuses.  Rhythmic  oscillations  in 
prosperity  and  adversity  will  no  doubt  continue  to  occur  in  busi- 
ness life  as  elsewhere.  But  with  a  better  grasp  of  the  principles 
of  credit,  with  an  increasing  responsibility  of  promoters  to  in- 
vestors, with  a  more  stable  demand  on  the  part  of  the  wage- 
earning  consumers,  and  above  all  with  the  more  efficient 
regulation  of  production  through  the  newer  forms  of  business 
enterprise  we  may  reasonably  look  forward  to  a  fairly  successful 
adjustment  of  capitalization  to  real  earning  capacity  and  to  a 
more  complete  adaptation  of  the  present  to  the  future.  When 
this  stage  is  reached,  credit  will  be  shorn  of  its  lurking  dangers 
and  will  stand  forth  in  its  true  light  as  an  unmixed  benefit  to 
solid  economic  progress. 


CHAPTER   XXX. 
INTERNATIONAL   TRADE. 

199.  References. 

J.  E.  Cairnes,  Principles  (1874),  part  3;  C.  F.  Bastable,  Theory  of  In-' 
ternational  Trade  (4th  ed.,  1903)  ;  G.  Clare,  The  ABC  of  the  Foreign 
Exchanges  (1893)  >  A.  W.  Margraff,  International  Exchange,  a  Practical 
Work  on  the  Foreign  Banking  Department  and  its  Administration  by 
American  Bankers  (1903) ;  G.  J.  Goschen,  Theory  of  the  Foreign  Ex- 
changes (yth  ed.,  1866)  ;  F.  Y.  Edgeworth,  Theory  of  International  Vahies 
(Econ.  Jour.,  IV,  1893)  >  F.  Walker,  Increasing  and  Diminishing  Costs  in 
International  Trade  (Yale  Rev.,  XII,  1904) ;  R.  Giffen,  The  Use  of  Export 
and  Import  Statistics,  in  his  Inquiries  (1904),  ch.  ix  ;  T.  Bacon,  Ameri- 
can International  Indebtedness  (Yale  Rev.,  IX,  1900);  H.  Fawcett,  Free 
Trade  and  Protection  (3d.  ed  1879)  '•>  F-  w-  Taussig,  Tariff  History  of  the 
United  States  (1892),  and  State  Papers  and  Speeches  on  the  Tariff  (1^2) ; 
E.  Stanwood,  American  Tariff  Controversies  in  the  Nineteenth  Century 
(2  vols.,  1903) ;  W.  J.  Ashley,  Tariff  Problem  (2d  ed.,  1904). 

200.   Basis -of  International  Trade. 

It  was  long  supposed  that  the  principles  of  international 
trade  differed  from  those  of  internal  commerce,  in  that  the 
former  was  subject  to  the  law  of  comparative  cost  and  de- 
pendent on  the  existence  of  non-competing  industrial  groups. 
We  now  know  that  the  law  of  comparative  costs  or  of  recipro-' 
cal  demand  is  the  explanation  of  all  exchange  (§  95),  and 
that  non-competing  industrial  groups  are  found  in  internal  in- 
dustry as  well  (§  178).  Trade  takes  place  between  nations 
as  between  individuals,  because  of  relative,  not  of  absolute, 
advantages.  One  country  A  may  produce  a  certain  class  of 
commodities  more  cheaply  than  B  and  nevertheless  find  it 
profitable  to  import  them,  because  A  can  produce  other  com- 
modities still  more  cheaply  than  B.  It  will  be  advantageous 
for  A  to  export  the  second  class  of  commodities  and  to  receive 

491 


49 2  International  Trade.  [§  200 

pay  for  them  by  importing  the  first.  The  entire  body  of  eco- 
nomic doctrine  elaborated  by  Ricardo,  Mill  and  Cairnes,  tend- 
ing to  show  that  international  trade  rests  on  the  equation  of 
reciprocal  demand  and  comparative  cost,  has  no  distinctive 
application  to  international  exchange  and  therefore  calls  for 
no  special  discussion  here. 

In  only  one  respect,  albeit  a  most  important  one,  does  ex- 
change between  nations  differ  from  that  between  individuals. 
"In  both  cases  indeed  a  surplus  enjoyment  is  sought.  The 
individual  endeavors  to  obtain  this  in  the'  form  of  money, 
because  the  more  money  he  has  the  richer  he  is.  The  nation, 
however,  cannot  follow  this  course.  The  mere  accumulation  of 
money  is  bootless.  A  nation  can  do  only  one  of  three  things 
with  its  funds,  (i)  The  money  may  be  hoarded.  In  mod- 
ern times,  however,  this  is  not  done,  because  public  credit  is  a 
cheap  substitute  for  government  hoards ;  and  because  after  a 
relatively  insignificant  point  has  been  reached,  a  reserve  of 
coin,  whether  for  currency  or  for  banking  purposes,  becomes 
unnecessary  or  even  wasteful.  (2)  The  money  may  be  spent 
at  once.  If  expended  abroad,  the  purchases  must  come  in  as 
imports ;  if  spent  at  home,  it  diverts  to  profitable  home  con- 
sumption what  would  otherwise  have  been  available  for  export. 
In  the  one  case  imports  are  increased,  in  the  other  exports 
are  lessened.  (3)  The  money  may  enter  general  circulation. 
The  necessary  result  of  this  is  to  raise  the  level  of  domestic 
prices,  to  check  exports  and  to  augment  imports,  until  the 
money  flows  out  again  and  the  international  level  of  prices  is 
restored. 

It  is  for  this  reason  that  imports  must  in  the  long  run  pay  for 
exports,  and  vice  versa.  This  does  not  mean  that  at  any  given 
time  imports  and  exports  must  be  equal.  The  state  of  recip- 
rocal liabilities  between  one  country  and  the  outside  world 
may  be  such  as  to  lead  to  a  permanent  excess  of  either  exports 
or  imports.  It  might  be  supposed  that  an  excess  of.  imports 
would  represent  profits  on  the  transaction.  One  nation  A  may 
sell  its  goods  abroad  at  an  advantage,  and  may  elect  to  bring 


§  2oo]  Basis.  493 

in  its  gains  in  the  shape  of  additional  goods,  which  would  then 
constitute  a  surplus  of  imports.  Ordinarily,  however,  the  other 
nation  B  will  do  the  same,  so  that  on  the  second  transaction 
there  will  be  a  surplus  of  exports  from  A  to  B.  Assuming  the 
gains  to  be  equal,  these  will  balance  each  other,  Thus,  while 
both  parties  secure  a  surplus  of  satisfaction,  there  will  be  no 
excess  of  exports  or  imports. 

On  the  other  hand,  it  must  be  remembered  that  goods  are  ex- 
changed not  only  for  goods,  but  for  services.  If  a  country  per- 
forms valuable  services  for  others,  they  must  be  remunerated, 
and  the  payment  will  ultimately  assume  the  form  of  extra  im- 
ports. England,  for  example,  at  the  present  time  does  at  least 
three  things  for  the  rest  of  the  world.  ( i )  The  British  merchant 
marine  is  so  immense  that  a  large  amount  of  trade  between 
other  countries  is  carried  on  in  British  bottoms.  The  freights 
paid  by  foreigners  go  to  swell  British  imports.  (2)  The  British 
system  of  marine  insurance  is  so  much  more  admirably  organ- 
ized than  that  of  other  countries,  that  a  great  part  of  the  ships 
and  cargoes  of  other  countries  are  insured  by  British  firms. 
The  profits  of  this  business  also  increase  the  volume  of  im- 
ports. (3)  International  debts,  as  we  shall  see  in  §  201,  are 
liquidated  largely  by  the  purchase  of  bills  of  exchange  on 
London.  The  commissions  to  the  London  bankers  again 
reach  England  in  the  form  of  imports.  Freights,  insurance 
profits,  and  commissions  together  amount  to  a  few  hundred 
millions  of  dollars  a  year.  Finally,  it  must  not  be  forgotten 
that  in  modern  times  international  transactions  take  place  in 
securities  as  well  as  commodities.  If  a  nation  has  invested 
heavily  in  foreign  bonds,  government  or  industrial,  the  interest 
on  the  invested  capital  will  accrue  in  the  shape  of  imports. 
Another  portion  of  the  vast  surplus  of  British  imports  is 
ascribable  to  this  fact. 

The  so-called  favorable  balance  of  trade  is  for  several  reasons 
a  delusion.  It  is  difficult  to  state  with  accuracy  the  exact  rela- 
tion between  exports  and  imports  :  for  (a)  where  there  is  a 
long  frontier  or  seacoast,  it  is  wellnigh  impossible  to  include 


494 


International  Trade. 


[§    200 


everything ;  (£)  even  where  everything  is  included,  there  is  no 
assurance  against  fraud  or  undervaluation ;  and  (V)  there  is 
no  uniformity  as  to  whether  values  should  be  calculated  at  the 
place  of  export  or  of  import,  that  is,  whether  cost  of  transpor- 
tation should  be  included.  The  statistics  themselves  are  there- 
fore of  dubious  value.  Even  if  the  balance  could  be  accurately 
ascertained,  however,  it  would  not  tell  us  anything  of  impor- 
tance. Some  prosperous  countries,  like  England,  Germany 
and  France,  habitually  import  far  more  than  they  export ; 
some  poor  countries,  like  Peru,  Siam  and  San  Domingo, 
habitually  export  more  than  they  import.  The  following  table 
will  show  the  relation  of  exports  to  imports  in  the  principal 
countries  of  the  world  : 

THE   RELATION   OF  EXPORTS   TO   IMPORTS   IN 
THE   PRINCIPAL  COUNTRIES. 


• 

Year. 

Imports. 

Exports. 

Excess  of  Ex- 
ports (+)  or 
Imports  (  —  ). 

United  Kingdom 
Germany 

1903 

IOO"? 

Dollars. 
2,640,564,000 

i  ^-»3  640  ooo 

Dollars. 
1,415,1/9,000 
I   IQ1  d.8^  OOO 

Dollars. 
-1,225,385,000 
—  27  C.  I  C7  OOO 

France 

JQQ-5 

8^0  68  c  ooo 

IOC.  ^Ld.7  OOO 

Netherlands  .  .  . 
Belgium 

1903 

IQO1 

912,376,000 

CI2  679  OOO 

781,750,000 

AO7  ''Q  C.  OOO 

—130,626,000 

—  105  "?S  .1  ooo 

Italy    

*y"j 

IQO7 

•J  CO  1  c8  OOO 

292,867,000 

—  66,491  ooo 

Switzerland   .  .  . 
Taoan  . 

1903 

IQO7 

230,860,000 

I  C7  QT.  C  OOO 

171,485,000 

14''  41  1  ooo 

-59.37  5,°°° 

—  I  ^  S7Q  OOO 

United  States  .  . 
Russia   

1904 
IQO2 

tj/»yjjr**' 

991,087,000 
308  563  ooo 

1,460,827,271 

AA.1  Ol6  OOO 

+469,7»779°o 

-f-  1  Id  *\O  1  OOO 

British  India  .  .  . 
Brazil 

1902-3 
IQO7 

278,054,000 

409,535,000 

+131,481,000 

Eervpt    , 

*-y^o 
IQO7 

82  81  1  ooo 

06  $SA  ooo 

-j-I  T    7-3->  OOO 

Roumania   .... 
Siam 

1903 
IOO2 

52,095,000 
i  c.  782  ooo 

68,637,000 

+16,542,000 

Haiti   

IQOI 

c  coo  OOO 

I  2  760  OOO 

+7  260  ooo 

The  table  on  the  following  page  and  the  chart  opposite  will 
show  the  conditions  in  the  United  States  for  the  past  thirty- 
five  years  : 


[DOLLARS  MERCHANDISE  EXPORTED  AND  IMPORTED. 

! 

fO-806T 
80-2061 
30-T06T 
TO-006T 
00-668T 
66-8681 
86-.168T 
Z6-968T 
96-S68T 
96-f68I 
t6-868T 
86-2681 
S6-T68T 
T6-068T 
06-6881 
68-888T 
88-Z88T 
Z8-988I 
98-S88T 
S8-T88I 
t8-888T 
88-2881 
28-T88T 
T8-088I 
06-6Z8T 
6I-8Z8T 
8Z-H8T 
H-9Z8T 
9Z-SZ8T 
9i-fM 

fi-ezst 
at-gist 

&-L18T 
Ti-OZ8I 
Oi-698T 

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/ 

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" 

S* 

S" 

X 

. 

PXPORTc; 

IMPORTS 

s 

ss 

1 

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\ 

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/ 

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. 

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V 

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»       oooooooooooooo 

3          OOOOOOOOOOOOOO 

9       -*tco«ii-iOc»aofc.WiQ-<ncoe*»s 

200] 


Exports  and  Imports. 


495 


EXPORTS   AND   IMPORTS    OF   MERCHANDISE, 
UNITED    STATES. 


Years  ending 
June  30. 

Total  Exports. 

Imports. 

Excess  of  Ex- 
ports over 
Imports. 

Excess  of 
Imports  over 
Exports. 

1870 

$7Q2  771  768 

$47  ^  O^S  408 

$43  1  86  640 

1871 

442,820  178 

520,223,684 

77,407  co6 

l8?2 

444,177,586 

626,50^,077 

182,417,491 

1877 

<;22,  479,022 

642,136,210 

119,656,288 

l87d. 

586,283,040 

C67  406  742 

$18  876  698 

187  C 

1:17,442,711 

577,  00^,476 

10,362.72^ 

1876 

cj4o  784,671 

46o,74I,IOO 

70.647  481 

l877 

6o2  4.7  C  2  2O 

4  CI  727  I  76 

I  c  I  I  C  2  084 

l8?8 

604,86^,766 

477,  OCI   1^72 

2^7,8l4,274 

l87Q 

7  10,4.70  441 

4.4  c;  777  77  C 

264  66  1  666 

1880 

8^c;,6i8,6t;8 

667,0^4  746 

167,687  012 

1881 

QO2.777  74.6 

642  664  628 

2CQ  712  7l8 

1882 

71^0,  ^42,2  C7 

724,670,  H74 

25  QO2  683 

1883 

827  87Q  4O2 

737  180  014 

100  658  488 

1884 

74O,  5  1  7,6OQ 

667,607,607 

72  8l  C  Ql6 

i88c; 

742  180  7  1;^ 

1:77  C27  7-7Q 

164  662  426 

1886 

870,^24  87O 

67^,476,176 

244,088  604 

1887 

716,183  211 

6Q2  7IQ  768 

27  867  447 

1888 

6cK  Q?4  CO7 

727  0^7  1  14 

28  OO2  607 

1880 

742.4Of.77t; 

74  C,  I  71,6^2 

2  770  277 

1800 

8=17828684 

78Q.7IO  4OQ 

68  518  275 

1891 

884,480,810 

844,016,106 

70  ^64,614 

1802 

1,030  278,148 

827  4O2  462 

2O2  875,686 

iScn 

847  66  <;  1  04. 

866  400  922 

l8  77S  7^8 

1804 

802,140,^72 

6^4,004  622 

277  I4H,<KO 

i8<K 

807x78,161: 

771,969,961; 

75,568,200 

1896 

882,606,938 

770,724,674 

102,882,264 

1807 

I  OZO  007,^6 

764  77O  412 

286,267,144 

1898 

1,271,482,770 

616,049,654 

61^  472  676 

i8qq 

1,227  O23  3°2 

607  ,  1  48  480 

C2Q  874  8l7 

1900 

1,394,483,082 

849,941,184 

C44,  ^41,808 

IQOI 

1,  487,7  CC  ^7 

822  677  016 

66^  082,  ^41 

1902 

1,381,719,407 

9O7,72O,948 

478,398,413 

1903 

1,420,141,679 

i,o2t;,7iQ,2i;7 

704  422,442 

I  QO4 

1,460,868,185 

001,000,078 

460,777  267 

496 


International  Trade. 


P 


20O 


Finally,  the  following  table  will  show  the  proportion  of 
United  States  exports  and  imports  to  and  from  the  various 
parts  of  the  world  : 

PERCENTAGE  OF  IMPORTS  AND  EXPORTS  FROM 
AND  TO  GRAND  DIVISIONS.1 


Year  ending  June  30. 

1891. 

1894. 

1897- 

1900. 

1904. 

Europe  : 

S4-36 
79-68 

19.32 
10.92 

14.05 
3.8l 

8.55 
2.89 

3-04 
2.10 

•50 

•54 

45-05 
78.56 

25-49 
13.42 

15.29 

3-72 

io.ro 
2-34 

3-28 
1-34 

•53 

•55 

56.26 
77-39 

I3-85 
11.89 

14.04 
3.21 

11.41 

3-74 

3-i9 
2.16 

1.25 
1.61 

51.84 
74-60 

15-30 
13-45 

1  1.  02 
2-79 

16.45 
466 

4.07 
3-11 

1.32 
i-39 

50-32 
72.42 

20.06 
16.08 

12.14 

3-47 

14.48 
4.12 

205 
2.25 

•95 
1.66 

Exports  

North  America  : 

Exports  

South  America  : 
Imports  

Exports  .      ... 

Asia: 
Imports    

Exports 

Oceania  : 
Imports  

Exports 

Africa  : 
Imports  

Exports  . 

An  excess  of  imports  may  represent  the  incurring  of  liabili- 
ties to  other  countries  which  must  be  met  hereafter,  or  it  may, 
on  the  contrary,  represent  a  liquidation  of  past  or  present  in- 
debtedness by  other  countries.  •  In  the  same  way  an  excess  of 
exports  may  mean  that  one  country  is  making  others  its  debt- 
ors or,  on  the  contrary,  it  may  be  a  measure  of  the  amount  of 
tribute  which  that  country  is  paying  to  others  for  past  or  pres- 
ent favors  in  the  shape  of  capital  invested  or  services  rendered. 
In  itself  the  so-called  balance  of  trade  is  irrelevant. 

1  Report  on  the  Foreign  Commerce  and  Navigation  of  the  U-  S.,  1904, 
Vol.  II,  p.  1030. 


§  2oi]  Rate  of  Exchange.  497 

The  error  consists  in  confounding  a  surplus  of  exports  over 
imports  with  a  surplus  of  production  over  consumption.  A 
nation,  like  an  individual,  ought  indeed  to  produce  more  than 
it  consumes,  in  the  sense  that  the  surplus  product  or  surplus 
energy  can  be  converted  into  durable  capital  and  thus  contin- 
ually augment  the  command  of  man  over  nature.  But  the 
surplus  of  production  over  consumption  is  a  very  different 
thing  from  a  surplus  of  exports  over  imports. 

201.  Rate  of  International  Exchange. 

International  like  domestic  transactions  are  settled  in  terms 
of  money :  the  machinery  for  effecting  payments  differs  in 
magnitude,  not  in  principle.  A  merchant  A  in  France,  let  us 
say,  has  imported  coffee  from  M  in  Brazil,  while  B  in  France 
has  exported  the  same  value  of  silks  to  N  in  Brazil.  Instead 
of  A  sending  money  to  M,  and  N  sending  it  back  to  B,  it  is 
far  simpler  for  A  and  B  to  settle  with  each  other  in  Paris,  and 
M  and  N  in  Rio  de  Janeiro.  B  accordingly  writes  an  order, 
known  as  a  bill  of  exchange,  to  N  directing  him  to  pay  M,  or, 
in  technical  language,  B  draws  on  N  ;  A  buys  this  bill  from  B 
and  remits  (*.  e.  sends)  it  to  M,  who  presents  it  to  N  and  gets 
it  cashed.  Thus  no  money  is  exported  and  only  one  bill  is 
drawn.  Inasmuch  as  it  is  not  always  easy  for  the  M's  and  N's 
to  find  each  other  in  Rio  de  Janeiro,  and  the  A's  and  B's  in 
Paris,  the  business  of  issuing  and  purchasing  such  bills  has 
become  the  function  of  the  banker  and  the  bill  broker.  More- 
over, since  these  bills  can  be  transferred  by  indorsement,  they 
are  available  for  payment  not  only  between  France  and  Brazil, 
but  between  any  other  countries  that  have  dealings  with  either 
one.  This  explains  the  so-called  "  three-cornered "  ex- 
change, where  country  A  imports  from  B  and  pays  by  drafts 
on  C  which  has  imported  from  A.  Finally,  since  it  is  necessary 
to  make  out  only  one  transferable  order,  bills  are  generally 
drawn  on  that  country  which  possesses  the  larger  financial 
centre.  In  fact,  the  great  mass  of  bills  especially  in  the  case 
of  exchanges  between  less  important  countries,  are  to-day  drawn 

32 


49 8  International  Trade.  [§  201 

on  London  in  pounds  sterling.  This  is  due  chiefly  to  the  im- 
mense volume  of  British  trade,  to  the  stability  of  the  British 
currency,  and  to  the  fact  that  the  seller  of  a  bill  on  London 
can  almost  invariably  count  upon  finding  a  buyer  on  advanta- 
geous terms. 

Where  the  reciprocal  liabilities  of  two  countries  are  precisely 
equal,  that  is,  where  the  payments  to  be  made  exactly  balance 
each  other,  exchange  is  said  to  be  at  par.  This  means  that  the 
amount  of  bullion  paid  for  a  bill  in  one  country  is  the  exact 
equivalent  of  the  value  of  the  bullion  received  in  the  other  coun- 
try. The  fine  gold  in  a  pound  sterling,  for  instance,  is  equal  to 
the  fine  gold  in  $4.86§ ;  hence  the  par  of  exchange  between 
England  and  the  United  States  is  $4.86-f.  It  is  obvious  that 
deviations  from  the  par  are  due  to  changes  in  the  condition  of 
reciprocal  liabilities,  which,  owing  to'  the  continual  oscilla- 
tions of  the  market,  are  never  for  any  length  of  time  precisely 
equal.  On  some  days  or  seasons  there  will  be  a  balance  in 
one  direction  and  the  demand  from  would-be  purchasers  of 
bills  exceeds  the  supply.  At  other  times  the  supply  of  bills 
offered  for  sale  will  exceed  the  demand.  According  to  these 
fluctuations  bills  become  dear  or  cheap,  and  exchange  will 
be  above  or  below  par.  The  meaning  of  the  phrase  "  a  rise 
or  fall  in  the  rate  of  exchange  "  depends  on  whether,  in  quot- 
ing the  par,  the  base  line  is  the  domestic  or  the  foreign  unit. 
Thus  in  London  the  par  of  exchange  with  some  countries 
is  quoted  in  pence ;  with  others  in  the  currency  of  those 
countries,  like  francs  or  marks.  In  the  United  States  the 
par  is  generally  quoted  in  dollars,  so  that  when  exchange  is 
said  to  rise  it  means  that  purchasers  of  bills  must  pay  more 
dollars  because  there  is  a  greater  demand  for  remittances  to 
settle  obligations  abroad.  The  limits  within  which  the  rate  of 
exchange  can  deviate  in  either  direction  from  par  are  called  the 
"gold  points,"  that  is,  the  points  beyond  which  it  becomes  profit- 
able to  export  or  to  import  gold  in  settlement  of  the  balance. 
It  is  only  in  exceptional  instances,  as  in  the  case  of  a  very 
stringent  money  market  when  dealers  are  ready  to  sell  bills  at  a 


§  201  ]  Rate  of  Exchange.  499 

sacrifice  or  when  there  is  a  short-lived  difficulty  in  a  gold-pro- 
ducing country  converting  its  bullion  into  coin,  that  it  is  pos- 
sible for  exchange  to  fall  below  the  specie  point,  or  to  rise 
above  it. 

When  the  exchanges  are  not  calculated  on  a  gold  basis,  the 
deviations  are  such  that  we  cannot  properly  speak  of  a  par  at 
all.  If  a  gold  standard  country  trades  with  a  silver  standard 
country,  the  par  itself  fluctuates  with  the  daily  change  in  the 
gold  price  of  silver.  The  same  is  true  of  a  depreciated  paper 
currency,  where  a  new  limit  to  the  rise  in  the  price  of  bills  is 
fixed  by  the  premium  on  gold. 

In  the  United  States,  foreign  bills  are  known  as  documentary 
and  finance  bills.     Documentary  bills  are  those  drawn  against 
the  export  of  commodities,  payable  at  sight  or  on  the  expira- 
tion of  three,  ten,  thirty,  sixty  or  ninety  days.     They  have 
attached  to  them  as  security  the  bill  of' lading,  insurance  cer- 
tificates, shippers'  invoices,  and  occasionally  other  documents 
like  consular  certificates,  certificates  of  origin  or  government 
inspection    certificates.      Finance    bills    are    those    drawn    by 
American  bankers  on  their  European  correspondents.     They 
are  often  covered  by  collateral  security  in  the  shape  of  stocks 
or  bonds  listed  on  the  New  York  stock  exchange.     The  ordi- 
nary causes  of  an  over-supply  of  "  foreign  bills  "  are  :    (i)  large 
exports  of  cotton,  wheat  and  corn,  especially  from  August  to 
November  of  each  year;    (2)   heavy  purchases  of  American 
securities  by  European  houses  ;  (3)  high  interest  rates  in  New 
York.     In  the  latter  case  American  bankers  find  it  profitable  to 
issue  sixty  or  ninety  day  bills  on  London  and  "  sell  sterling," 
loaning  the  proceeds  on  Wall  Street.     If  the  interest  rate  in 
New  York  is  six  per  cent  and  the  discount  rate  in  London 
three  per  cent,  there  will  be  a  profit  over  and  above  the  com- 
missions of  the  drawees  and  the  British  stamp  taxes.     In  order 
to  eliminate  the  risk  of  having  to  pay  a  higher  price  for  the 
sterling  draft    required  when  the  loan  matures,  they  buy   at 
once  a  foreign  exchange  "  future  "  or  demand  draft  for  future 
delivery.      These    foreign    exchange    "futures"    perform    the 


500  International  Trade.  [§  201 

same  function  as  the  wheat   and  cotton  futures  described  in 

§  155- 

Since  the  rate  of  exchange  depends  on  reciprocal  liabilities, 
anything  that  affects  temporary  indebtedness  causes  the  rate  to 
fluctuate.  If  we  were  to  strike  a  balance  sheet  in  the  foreign 
trade  of  any  country,  we  should  have  to  put  on  the  credit  side 
not  only  the  exports  of  commodities,  but  such  items  as  freights, 
commissions,  brokerages,  the  excess  of  insurance  premiums  over 
payments,  loans  from  a  foreign  country,  interest  on  loans  to  a 
foreign  country,  profits  on  capital  invested  abroad,  the  amount 
drawn  on  letters  of  credit  belonging  to  travellers  from  abroad, 
the  sums  brought  in  by  immigrants,  sales  of  securities,  and  the 
gains  made  on  arbitrage  operations.  All  these  items  act  on 
the  rate  of  exchange  precisely  as  do  exports ;  that  is,  they  tend 
to  diminish  the  demand  for  bills  or  to  reduce  the  rate  of 
exchange,  and  they  require  additional  imports  to  restore  the 
equilibrium.  So  on  the  debit  side  we  must  put  not  only  the 
imports,  but  the  purchases  of  securities,  the  loans  to  a  foreign 
country,  the  interest  on  loans  from  abroad,  letters  of  credit 
issued  to  travellers  going  abroad  and  the  like.  These  tend  to 
increase  the  demand  for  bills  and  to  raise  the  rate. 

Gold  will  therefore  be  exported  or  imported  only  when  it 
is  necessary  to  restore  the  equation  of  international  indebted- 
ness. This  equation  or  equilibrium,  however,  as  has  just  been 
explained,  is  not  between  exports  and  imports  but  between 
credits  and  liabilities.  The  equilibrium  is  attained  when  the 
credits  balance  the  liabilities,  and  may  be  perfectly  compatible 
with  an  excess  of  either  imports  or  exports.  Unless  there  are 
special  causes  arising  out  of  some  defects  in  the  currency  sys- 
tem itself,  as,  for  instance,  during  the  period  of  the  silver  agi- 
tation in  the  United  States,  especially  from  1894  to  1896, 
gold  will  be  exported  when  the  liabilities  for  a  time  exceed 
the  credits,  but  not  necessarily  when  the  imports  exceed  the 
exports.  The  permanent  international  distribution  of  the 
precious  metals  is  therefore  dependent  on  the  conditions  of 
international  trade  in  the  broadest  sense.  Thus  we  reach 


§  202]  Growth  of  Free  Trade.  501 

from  another  point  of  view  the  conclusion  reached  above 
(§  192),  that  no  country  on  a  sound  currency  basis  can  per- 
manently have  more  or  less  money  than  it  needs. 


202.   Growth  of  Free  Trade. 

By  free  trade  is  meant  nowadays  the  freedom  of  interna- 
tional trade  from  interference  by  government  restriction  or 
prohibition.  Originally,  however,  the  demand  for  freedom  of 
trade  applied  as  well  to  internal  commerce.  In  classic  Rome 
the  portoria  comprised  all  classes  of  taxes  on  transportation. 
In  mediaeval  Europe  town  was  shut  off  against  town  and 
province  against  province  by  burdensome  tolls  and  interdic- 
tions, and  at  every  point  on  the  land  and  water  highways  large 
sums  were  exacted,  just  as  strangers  who  to-day  traverse  the 
region  of  some  mid-African  potentate  are  required  to  pay 
exorbitant  passage  fees.  The  origin  of  interference  with  trade 
is  thus  to  be  sought  in  the  double  reason,  —  the  primeval  / 
assumption,  of  which  there  are  still  so  many  survivals,  that 
strangers  are  synonymous  with  enemies,  and  the  opportunity 
of  securing  a  simple  and  abundant  revenue.  With  the  grow- 
ing recognition  of  the  mutual  advantages  of  an  unimpeded 
traffic,  and  with  the  discovery  of  other  equally  good  sources 
of  income,  these  relics  of  a  more  primitive  economic'  life 
gradually  disappeared.  In  the  United  States  the  results  of  the 
commercial  jealousy  among  the  states  that  had  just  won  their 
independence  were  so  disastrous  that  the  new  constitution  of 
1789  made  it  impossible  for  any  commonwealth  to  interfere 
with  interstate  commerce.  Freedom  of  internal  trade  is  now 
assured  in  the  whole  civilized  world,  subject  only  to  necessary 
police  regulations. 

Even  in  the  sense  of  international  commerce,  however,  free 
trade  signifies  at  present  something  quite  different  from  what 
it  denoted  in  former  centuries.  In  the  middle  ages  the  liberty 
of  exporting  commodities  was  often  restricted  to  especially  se- 
lected individuals  or  companies  or  limited  to  certain  localities, 


502  International  Trade.  [§  202 

as  in  the  case  of  the  Staple l  towns  in  England  and  her  conti- 
nental possessions.  The  cry  for  free  trade  which  arose  in 
seventeenth-century  England  involved  the  demand  for  free- 
dom of  export  in  the  sense  of  freedom  from  monopolist  com- 
panies or  favored  towns  (§50).  It  was  advanced  by  the  very 
individuals  who  were  clamoring  for  protection  through  high 
duties  on  imports.  Free  trade  in  the  modern  sense  of  free 
imports  was  a  later  conception. 

The  mediaeval  impediments  to  international  trade  apart  from 
those  just  mentioned  consisted  of  taxes  and  prohibitions.  In 
the  opening  centuries  of  the  middle  ages  they  were  applied 
primarily  to  exports,  and  even  after  "  free  trade  "  in  the  earlier 
sense  had  been  attained  the  customs 2  duties  of  the  European 
countries  still  consisted  to  a  large  extent  of  taxes  on  exports. 
It  was  free  trade  because  the  duties  applied  to  all  individuals 
alike,  and  because  the  goods  might  be  shipped  anywhere  after 
payment  of  the  tax.  A  pronounced  increase  of  import  duties, 
however,  was  effected  by  the  rise  of  the  Mercantile  system  in 
the  seventeenth  century.  With  the  awakening  of  the  national 
spirit  and  the  desire  to  foster  domestic  industry,  restrictions 
were  imposed  on  the  importation  of  any  foreign  commodities 
that  might  interfere  with  home  production.  The  system  of 
protection  was  not  new,  but  it  was  now  applied  on  a  national 

1  The  word  staple  is  derived  from  the  German  stapeln,  "  to  heap  up," 
and  was  applied  to  certain  commodities  which  were  stored  in  large  quan- 
tities in  the  Steel-yard  (i.e.  the  Staple  yard,  "  Stapelhof ")   which  the 
Hansa  towns  maintained  in  London.     The  list  of  staple  articles  which  at 
first  comprised  chiefly  wool,  woolfells,  tin,  and  leather,  was  gradually 
increased  until  the  number  of  staple  articles  at  present  is  considerable. 

2  The  term  "customs  tariff"  has  a  bizarre  origin.    The  English  kings 
were  forced  to  rely  for  their  revenue,  apart  from  the  crown  lands,  to  a 
very  large  extent  on  the  export  and  import  duties.     These  became  the 
customary  revenue,  until  finally  Parliament  granted  various  rates  known 
as  the  Great  Customs  and  the  Little  Customs.     The  second  part  of  the 
modern  term  was  formerly  said  to  be  derived  from  the  town  of  Tarifa 
on  the  Mediterranean  near  the  Straits  of  Gibraltar,  where  the  Barbary 
pirates  held  the  straits  and  exacted  a  graduated  scale  of  passage  money 
from  all  vessels.     More  recent  etymologists,  however,  now  trace  it  to  the 
Arabic  "  ta'rif,"  or  inventory. 


§  202]  Growth  of  Free  Trade.  503 

scale.  In  those  countries  which  possessed  colonies,  like  Por- 
tugal, Spain,  the  Low  Countries,  France  and  England,  it  be- 
came known  as  the  Colonial  system,  and  only  later  acquired 
the  name  of  the  Protective  or  Mercantile  system.  It  consisted 
of  several  or  of  all  of  the  following  factors  : 

(i)  Bounties  on  the  raising  or  export  of  raw  materials  in 
the  colonies ;  (2)  limitation  to  the  mother  countries  of  the 
export  of  certain  enumerated  commodities  from  the  colonies ; 
(3)  prohibition  of  colonial  production  of  manufactured  arti- 
cles ;  (4)  high  protective  or  even  prohibitory  duties  on  im- 
ports of  manufactures  from  abroad;  (5)  restriction  of  the 
carrying  trade  between  the  colonies  and  the  mother  country 
to  vessels  of  the  latter.  In  the  case  of  food  the  policy  of 
agricultural  protection  fluctuated  between  bounties  on  exports 
and  high  duties  on  imports. 

It  was  in  England  that  the  system  was  carried  to  an  extreme, 
and  it  was  there  that  the  reaction  first  came.  During  the  period 
of  the  industrial  revolution,  which,  as  we  know,  began  in  Eng- 
land several  decades  earlier  than  elsewhere,  Great  Britain  pur- 
sued a  policy  of  the  most  rigorous  industrial  protection.  Not 
only  were  many  of  the  import  duties  quite  prohibitory,  but  the 
export  of  machinery  or  even  of  the  plans  of  machinery  was 
absolutely  forbidden.  Compared  with  the  British  tariffs  of  the 
end  of  the  eighteenth  and  the  beginning  of  the  nineteenth  cen- 
tury, even  the  most  complex  of  modern  tariffs  is  simplicity  itself. 
When  Great  Britain  had  finally  attained  a  virtual  monopoly  of 
the  chief  industries  and  had  established  her  supremacy  on  the 
ocean,  she  naturally  found  it  to  her  interest  to  let  down  the  bars. 
Not  fearing  foreign  competition  any  longer  at  home,  her  great 
need  was  to  secure  an  outlet  for  her  surplus  products.  More- 
over, the  transition  from  the  agricultural  economy  to  the  factory 
system  had  converted  her  from  an  exporter  to  an  importer  of 
food.  The  industrial  interests  experienced  no  serious  oppo- 
sition to  the  policy  of  relaxing  the  barrier  of  import  duties  on 
manufactures.  But  when  they  sought  to  secure  cheaper  mate- 
rials and  food  by  abolishing  the  agricultural  duties,,  they  met 


504  International  Trade.  [§  202 

with  a  stout  resistance  from  the  landed  interests.  The  victory 
of  the  Anti-Corn-Law-League  in  the  forties  was  the  final  tri- 
umph of  the  industrial  over  the  agricultural  interests.  Free 
trade  was  now  an  accomplished  fact. 

For  a  short  time  the  free  trade  movement  made  some  head- 
way in  other  European  countries,  although  in  several  it  was 
subordinate  to  the  wider  scheme  of  removing  the  remnants  of 
mediaeval  shackles  on  internal  trade  and  industry  in  general. 
With  the  revival  of  the  national  sentiment,  however,  first  in 
Germany  and  Italy  and  then  elsewhere,  the  last  quarter  of 
the  nineteenth  century  witnessed  not  only  a  return  to,  but  an 
intensification  of,  protection.  Finally,  as  the  younger  indus- 
trial nations  are  attaining  their  maturity,  Great  Britain  is  com- 
mencing to  lose  her  proud  position  of  complete  industrial 
domination,  and  we  accordingly  find  since  the  beginning  of 
the  twentieth  century  in  the  classic  home  of  free  trade  itself  a 
sharply  defined  movement  for  a  return  to  protection. 

In  the  United  States  the  system  of  protection  on  a  national 
scale  began  with  the  threatened  dangers  to  the  industries  that 
had  been  called  into  existence  by  the  war  of  1812.  From  that 
day  to  this,  the  protective  policy  has  been  followed,  interrupted 
only  for  the  few  decades  during  which  the  non- industrial  South 
was  in  the  political  saddle.  With  the  downfall  of  slavery  there 
began  an  era  of  far  more  stringent  protection  which  has  con- 
tinued with  slight  oscillations  to  the  present. 

The  chief  dates  in  the  tariff  history  of  the  United  States  are 
as  follows :  1789,  first  tariff  with  a  few  small  protective  duties, 
and  a  general  level  of  five  per  cent  on  the  non-protected  com- 
modities ;  1816,  first  general  protective  tariff,  with  rates  of 
thirty  per  cent  and  over  on  certain  textiles;  1824,  moderate 
increases;  1828,  the  "Tariff  of  Abominations,"  with  higher 
rates  and  duties  on  raw  materials;  1833-1841,  the  Com- 
promise Tariff,  with  gradual  reductions;  1842,  slight  changes, 
but  a  comparatively  low  level;  1846,  the  Free  Trade  Tariff, 
with  ad  valorem  revenue  duties;  1857,  a  still  lower  revenue 
tariff;  1861,  1862  and  1864,  War  Tariffs,  with  incidental  pro- 


§  2o3]          Argument  for  Protection.  505 

tection;  1871,  ten  per  cent  reduction;  1875,  restoration  to 
the  old  level;  1883,  slight  changes;  1890,  McKinley  Tariff, 
with  higher  rates;  1894,  Wilson  Tariff,  with  reduced  rates; 
1897,  Dingley  Tariff,  now  in  force,  with  higher  rates. 

Free  trade,  therefore,  as  a  world  policy  is  far  from  being 
assured.  In  fact  the  tendency  of  recent  years  is  away  from, 
rather  than  in  the  direction  of,  the  more  liberal  movement.  It 
is  accordingly  necessary  to  consider  the  arguments  somewhat 
more  closely. 

203.  The  Argument  for  Protection. 

The  reasons  that  have  been  usually  advanced  in  favor  of 
protection  may  be  reduced  to  five  heads. 

(1)  The  "balance   of  trade"   argument   claims    that   it   is 
necessary  to  restrict  imports  in  order  to  secure  a  surplus  of 
exports  and  thus  to  increase  the  wealth  of  the  country  by  aug- 
menting the  stock  of  the  precious  metals  brought  in  through 
this    favorable    balance    of  trade.      The    fallacy    of   this    old 
Mercantilist   contention  is   obvious,      (a)    In  the  first  place, 
exports,  as  we  have  seen,  must  in  the  long  run  pay  for  im- 
ports, and  it  is  impossible  to  increase  the  surplus  of  exports 
simply  by  diminishing  imports.      (b}    Secondly,    coin    is    not 
imported   when    exports    exceed    imports,    but    when    credits 
exceed    liabilities,      (c)   Thirdly,  wealth   does  not    consist  of 
money,  but  of  money's  worth,  and   after   a  certain  point  has 
been  reached  the  importation  of  coin  defeats  its  own  object. 
So    defective    indeed    is    this  argument  that    it  is  no    longer 
advanced  by  serious  students. 

(2)  The  "home  market"  argument  played   a  great  role  in 
the  earlier  political  controversies  of  the  United  States  and  in  a 
slightly  modified  shape  formed  the  basis  of  Carey's  defence  of 
protection.    It  is  founded  on  the  belief  that  protection  is  bene- 
ficial to  agriculture  as  well  as  to  industry,  because  the  resulting 
increase  of  population  and  wealth  will  afford  a  larger  market 
for  the  food  and  raw  material  of  the  immediate  neighborhood. 
Moreover,  the  existence  of  industrial  centres  will  enable   the 


506  International  Trade.  [§  203 

farmers  to  devote  attention  to  the  more  perishable  products  to 
which  transportation  to  a  distance  would  be  injurious  or  fatal, 
and  will  thus  lead  to  more  intensive  and  diversified  farming. 
Finally,  the  development  of  the  home  market,  it  is  said,  will 
obviate  the  costly  expense  of  transportation  to  distant  countries 
and  will  thus  increase  the  wealth  of  society  in  general.  This 
argument  has  now  been  weakened,  partly  because  the  revolu- 
tion in  the  methods  of  transportation  has  materially  lessened 
the  importance  of  distance  as  a  factor  in  cost,  partly  because 
the  agricultural  and  mineral  output  of  the  United  States  has  so 
vastly  transcended  the  limits  of  domestic  consumption  that  the 
prosperity  of  large  sections  depends  upon  securing  an  outlet 
for  the  surplus.  It  is  the  foreign  market,  not  the  home  market, 
which  is  beginning  to  loom  large  in  the  imagination  of  the 
farmer. 

(3)  More  important  of  recent  years  is  the  "  wages  "  argu- 
ment. In  the  United  States  this  takes  the  form  of  ascribing 
to  the  protective  system  the  chief  efficacy  in  maintaining  high 
wages.  It  declares  that  unless  the  tariff  rates  are  elevated 
enough  at  least  to  compensate  for  the  difference  between  the 
domestic  and  the  foreign  standard  of  wages,  the  former  will 
drop  to  the  level  of  the  latter.  To  this  the  free  trader  is  accus- 
tomed to  rejoin  as  follows  :  (a)  The  argument  as  advanced  by 
the  manufacturers  is  insincere,  because  they  are  interested  not 
in  high  wages  but  in  large  profits.  (<£)  There  must  be  a  gross 
fallacy  in  the  argument,  because  it  assumes  precisely  the  oppo- 
site form  in  countries  where  wages  are  low.  Germany  demands 
protection  against  England  and  Russia  against  Germany,  on 
the  ground  that  their  low-priced  laborers  need  to  be  protected 
against  their  more  skilful  and  higher  class  competitors.  In 
some  countries  protection  is  demanded  because  wages  are  high ; 
in  other  countries,  because  wages  are  low.  If  the  Russian 
argument  is  good,  the  American  argument  must  be  bad,  and 
vice  versa. 

From  the  point  of  view  of  economic  principle  the  following 
considerations  may  be  advanced.  In  the  first  place,  we  must 


§  2o3]          Argument  for  Protection.  507 

not  forget  the  distinction  between  high  wages  and  high  cost. 
Other  things  being  equal,  higher  wages  indeed  connote  higher 
cost ;  but,  as  we  learned  above  (§  125),  there  may  be  an  econ- 
omy in  high  wages.  If  high  wages  are  an  evidence  of  high 
productive  efficiency  and  go  hand  in  hand  with  improved 
machinery  or  superior  natural  advantages,  high  wages  may 
mean  low  cost.  It  is  precisely  in  those  occupations  where 
wages  are  highest  in  comparison  with  abroad,  as  in  the  produc- 
tion of  boots,  bicycles,  cottons  and  wheat,  that  America  is  able 
to  export  successfully,  showing  that  in  these  occupations  at 
least  high  wages  are  no  obstacle  to  cheap  production.  While, 
however,  this  consideration  undeniably  impairs  the  general 
argument,  it  does  not  successfully  meet  the  point  that  there  are 
other  industries  which  would  not  be  able  to  withstand  foreign 
competition  at  home  if  the  present  wage  schedule  were  main- 
tained concurrently  with  a  withdrawal  of  protection.  On  the 
other  hand,  this  proves  only  that  these  particular  industries 
would  not  exist ;  it  does  not  prove  that  there  would  be  any 
reduction  in  the  rate  of  wages  in  the  other  industries  which 
would  continue  or  which  might  be  newly  started.  Whether 
wages  would  fall  would,  so  far  as  this  point  is  concerned, 
depend  upon  the  possibility  of  profitably  employing  in  the  old 
and  permanent  as  well  as  in  the  newly  started  occupations 
the  capital  and  labor  hitherto  utilized  in  the  now  abandoned 
industries.  To  the  extent  that  this  might  not  be  possible  there 
would  indeed  be  a  tendency  for  wages  to  fall,  because  of  the 
diminished  productivity  of  labor.  It  is  clearly  inadmissible, 
however,  to  argue  that  this  must  necessarily  be  the  case. 

This  leads  to  the  consideration  that  the  direct  influence  of 
protection  on  wages  has  been  exaggerated.    The  rate  of  wages    ; 
depends,  as  we  know  (§  175),  upon  the  location  of  the  margin 
of  productivity.     Where  natural  resources  are  abundant,  wages 
will  be  high  with  or  without  protection.     The  difference  be-   < 
tween  American  and  European  wages  was  no  less  striking  before 
the  policy  of  protection  was  inaugurated  in  the  United  States 
than  it  is  at  present.     In  point  of  fact,  protection  was  then 


508  International  Trade.  [§  203 

demanded  on  the  ground  that  American  wages  were  high,  and 
no  one  thought  of  ascribing  the  existing  high  wages  to  a  non- 
existing  protection.  In  the  same  way,  wages  in  England  have 
exceeded  those  in  Germany  alike  during  the  periods  of  pro- 
tection and  free  trade..  Moreover,  a  large  part  of  industry  in 
every  country,  as  the  railways,  the  building  trades  and  the  like, 
is  necessarily  local  and  not  exposed  to  foreign  competition. 
Wages  in  these  occupations  are  hence  not  directly  affected  by 
any  policy  of  foreign  trade.  It  is  only  to  the  extent  that  pro- 
tection has  an  influence  in  relocating  the  margin  of  the  pro- 
ductivity of  labor  in  general  by  affecting  the  accumulation  of 
capital  and  the  efficiency  of  labor  that  it  can  exert  any  influence 
on  wages.  But  this  can  be  accomplished  only  if  the  protected 
industries  actually  involve  the  most  profitable  utilization  of  labor 
and  capital.  The  wages  argument  in  this  form,  however,  dif- 
fers considerably  from  the  common  and  crude  formulation,  and 
in  reality  fuses  into  the  arguments  to  be  mentioned  below.  In 
its  crude  form  the  wages  argument  is  not  convincing.  Pro- 
tection explains  the  high  wages  in  America  as  little  as  the  low 
wages  in  Russia.  Low  wages  are  found  under  protection ;  high 
wages  under  free  trade. 

(4)  The  "  infant  industry  "  argument  is  the  one  which  for 
a  long  time  enjoyed  the  principal  reputation,  especially  because 
]  Mill  in  his  general  defence  of  free  trade  made  in  this  case  an 
important  concession.  Although  in  its  theoretic  formulation 
usually  ascribed  to  Friedrich  List,  it  is  found  substantially  in 
Alexander  Hamilton's  celebrated  Report  on  Manufactures 
in  the  last  decade  of  the  eighteenth  century,  and  more  fully  in 
the  work  of  Daniel  Raymond  with  which  List  had  become  ac- 
quainted during  his  sojourn  in  America.  The  theory  asserts  that 
just  as  children  need  the  fostering  care  of  their  parents  during 
the  period  of  infancy,  so  the  feeble  and  newly  started  industries 
need  to  be  carefully  protected  during  their  years  of  weakness. 
It  is  conceded  that  this  involves  an  expense,  but  it  is  claimed 
that  it  must  not  be  considered  an  economic  loss  any  more  than 
the  expense  of  raising  a  family  is  in  the  true  sense  a  loss ;  for 


§  203]  Argument  for  Protection.  509 

both  will  more  than  pay  for  themselves  when  they  reach  matur- 
ity 0  In  the  case  of  industries  this  result  will  be  brought  about 
by  the  competition  between  the  domestic  enterprises,  which 
will  ultimately  reduce  the  prices  of  the  commodities  to  a  point 
lower  than  that  of  the  foreign  wares  with  the  cost  of  transpor- 
tation added. 

List  formulated  the  theory  a  little  differently.  According  to 
him  production  involves  not  only  the  turning  out  of  definite 
commodities,  but  the  creation  at  present  of  the  possibility  of 
turning  out  more  commodities  hereafter.  The  real  economic 
function  of  society  is  not  simply  to  produce  goods  but  to  pro- 
duce productive  forces.  Through  protection,  government 
achieves  this  educational  end  and  thus  trains  the  nation  to 
industrial  efficiency.  National  strength  and  power  are  the 
keynote  of  List's  programme,  just  as  national  industrial  inde- 
pendence was  the  objective  of  Hamilton  and  Raymond.  List's 
work,  The  National  System  of  Political  Economy,  bears  the 
motto,  Et  la  patrie  et  rhumanite,  —  "  my  country  as  well  as 
the  world."  The  policy  of  government  must  therefore  change 
with  economic  conditions.  In  the  purely  agricultural  stage 
when  a  country,  like  the  United  States  in  the  eighteenth  cen- 
tury, is  not  yet  ripe  for  industrial  advance,  protection  would 
be  folly ;  in  the  fully  developed  industrial  stage,  as  in  England 
during  the  nineteenth  century,  protection  would  be  equally 
inane  ;  but  in  the  transition  stage,  as  in  the  United  States  and 
Germany  at  present,  protection  is  as  necessary  as  it  will  ulti- 
mately be  profitable. 

It  will  be  recognized  that  List's  argument  differs  from  that 
of  Carey  and  the  home  market  theorists  in  two  respects :  it 
does  not  involve  agricultural  protection  and  it  is  confessedly 
temporary  in  character.  With  the  lapse  of  every  decade  and 
the  growth  of  the  infant  industries  into  lusty  manhood  the 
argument  becomes  continually  weaker,  and  protection  becomes 
less  defensible  as  a  permanent  policy.  This  has  led  to  the  final 
and  most  recent  argument. 

(5)  The  "variegated  production"  argument,  as  it  might  be' 


5 1  o  International  Trade.  [§  204 

called,  accepts  the  one  point  in  the  Hamilton-List  theory, 
but  discards  the  other.  It  emphasizes  the  idea  of  national 
industrial  independence,  but  maintains  that  the  chief  desider- 
atum is  a  well-rounded  economic  development,  with  a  due 
consideration  for  all  the  various  national  interests.  In  a 
country  like  Germany,  for  instance,  where  the  foreign  com- 
petition of  virgin  lands  would  mean  the  ruin  of  domestic  agri- 
culture, the  increased  cost  of  food  and  raw  material,  it  is 
claimed,  would  be  a  cheap  price  to  pay  for  the  preservation 
of  a  healthy  and  prosperous  farming  class.  On  the  other  hand, 
a  variegated  industry  is  undoubtedly  a  sign  of  progress,  and  to 
the  extent  that  it  denotes  a  more  efficient  utilization  of  labor 
and  capital  and  a  help  to  enterprise,  it  will  result  in  higher 
wages  as  well  as  greater  profits,  a  better  standard  of  life  for 
the  workman  and  a  more  prosperous  condition  for  the  manu- 
facturer. Even  if  domestic  prices  are  higher  than  those  of 
foreign  goods,  the  loss  to  the  individuals  as  consumers  is  more 
than  offset  by  the  gain  that  accrues  to  them  as  producers  and 
as  participants  in  the  general  prosperity.  Thus  protection  is 
demanded  as  a  permanent  policy. 

204.   The  Argument  for  Free  Trade. 

To  these  arguments  the  free  traders  make  rejoinders  in 
detail,  all  of  them  based  on  an  affirmative  position  which,  as 
elaborated  by  Adam  Smith  and  the  Physiocrats,  is  simplicity 
itself.  International  trade  is  like  internal  trade  :  the  freer  it 
is,  the  greater  are  the  advantages  to  both  parties.  The  idea 
that  what  one  man  or  one  country  gains  in  trade  the  other 
loses  is  a  fallacy  scarcely  less  baleful  than  the  idea  that  any 
one  can  get  rich  by  impoverishing  his  customers.  For  in  for- 
eign trade  the  other  country  is  not  so  much  a  rival  as  a  cus- 
tomer ;  if  by  restricting  imports  we  exclude  their  wares,  by 
diminishing  exports  we  necessarily  prevent  them  from  buying 
our  wares.  By  allowing  trade  to  be  absolutely  unfettered,  every 
one  is  able  to  buy  in  the  cheapest  and  to  sell  in  the  dearest 
market,  and  the  gains  of  all  will  be  at  a  maximum.  Every 


§  204]          Argument  for  Free  Trade.  5 1 1 

nation  will  thus  be  in  a  position  to  develop  its  natural  advan- 
tages to  the  utmost,  and  the  world's  wealth  will  be  enhanced 
because  of  the  distribution  of  productive  energies  in  the  most 
economical  fashion.  Just  as  free  trade  among  the  separate 
commonwealths  of  the  United  States  results  in  the  most  effi- 
cient utilization  of  economic  forces,  so  free  trade  among  the 
nations  of  the  world  will  bring  about  the  greatest  development 
of  wealth.  Anything  that  obstructs  this  free  trade  is  a  step 
backward. 

According  to  this  argument,  protection  is  injurious  in  sev- 
eral ways,  (i)  It  involves  an  unnecessary  tax  on  the  con- 
sumer, because  it  increases  prices  by  the  amount  of  the  tariff. 
Protection  is  thus  a  robbery  of  the  many  for  the  benefit  of  the 
few.  It  is  class  legislation,  and  for  that  reason  alone  repre- 
hensible. (2)  It  means  a  maladjustment  of  economic  forces. 
Like  all  other  government  interference,  it  savors  of  paternalism 
or  socialism.  (3)  Protection  does  not  really  protect,  because 
it  destroys  as  many  industries  as  it  artificially  fosters.  Well- 
nigh  every  commodity  is  a  raw  material  for  some  other  com- 
modity. A  high  duty  on  iron  interferes  with  the  iron  industry  ; 
a  high  duty  on  iron  products  interferes  with  the  machines 
constructed  of  such  products ;  a  high  duty  on  machines  in- 
terferes with  industries  that  use  the  machines.  If  protective 
duties  were  abolished,  it  is  indeed  possible  that  some  indus- 
tries would  disappear,  but  it  is  more  than  likely  that  other 
industries,  now  handicapped  by  high  duties  on  the  manufac- 
tures which  constitute  their  raw  material,  would  flourish.  A 
tariff,  therefore,  means  a  dislocation,  rather  than  a  protection, 
of  industry  in  general.  (4)  Protection  involves  political  cor- 
ruption on  a  gigantic  scale.  One  has  but  to  witness  the  scenes 
in  and  about  the  committee  room  when  a  new  tariff  is  being 
framed  in  the  United  States  to  realize  that  there  exists  no 
more  potent  engine  of  political  demoralization.  Section  is 
pitted  against  section,  interest  against  interest,  business  against 
business,  and  the  final  result  is  due  to  log-rolling  and  a  series 
of  "  unholy  alliances."  (5)  Protection  is  responsible  for  the 


5 1  2  International  Trade.  [§  205 

persistence  of  national  animosities,  while  retaliatory  tariffs  and 
commercial  wars  are  often  a  prelude  to  the.  actual  clash  of 
arms.  Free  trade  means  peace  and  good-will ;  protection 
leads  logically  to  international  hatred  and  bloodshed.  The 
one  implies  the  reign  of  humanity  and  brotherhood,  the  other 
of  particularism  and  enmity.  The  one  spells  progress ;  the 
other,  retrogression. 

205.    Conclusion. 

If  now  we  attempt  impartially  to  weigh  these  contending 
arguments,  several  points  at  once  force  themselves  upon  our 
attention.  In  the  first  place,  some  of  the  positions  occupied 
by  extremists  on  both  sides  are  untenable.  The  protectionists 
err,  as  we  have  seen,  in  emphasizing  the  balance  of  trade  ar- 
gument, the  home  market  argument  or  the  wages  argument, 
at  least  in  its  crude  form.  The  free  traders  err  in  claiming 
that  protection  is  simply  class  legislation  or  socialism,  or  that 
it  is  responsible  for  national  animosity. 

(i)  As  to  class  legislation,  protection  is  supported  in  the 
United  States  by  factory  owners,  laborers,  and  farmers  alike. 
Some  sections  and  some  enterprises,  indeed,  may  derive  more 
benefit  than  others,  but  that  is  the  inevitable  result  of  almost 
all  legislation.  That  in  certain  countries  and  in  special  cases 
indefensible  preferences  inimical  to  the  common  welfare  shel- 
ter themselves  under  the  segis  of  a  protective  tariff  cannot  be 
used  as  an  indictment  of  the  system  in  general.  Everywhere 
we  must  distinguish  between  use  and  abuse.  Where  popular 
government  and  constitutional  safeguards  exist,  legislation  in 
behalf  of  a  particular  class  is  not  likely  permanently  to  endure 
unless  the  community  identifies  the  interests  of  that  class 
with  its  own.  (2)  Again,  to  affirm  that  protection  is  pater- 
nalism or  socialism  is  simply  to  call  names,  and  to  make 
the  unwarranted  assumption  that  the  ideal  of  government  is 
laissez  faire.  (3)  Finally,  to  assert  that  protection  is  the 
cause  of  national  animosity  is  clearly  to  put  the  cart  before 
the  horse. 


§205]  Protection  Discussed.  513 

Abandoning  these  far  from  impregnable  positions,  there  still 
remains  an  element  of  weakness  in  the  arguments  of  both  sides. 
Even  the  more  moderate  advocates  of  protection  are  apt  to 
overrate  its  importance.  The  efficacy  of  protection,  even  at 
the  best,  is  not  unlimited.  No  degree  of  protection  can  make 
cotton  growing  permanently  successful  in  Maine,  or  put  the 
silk  industry  on  a  stable  foundation  in  the  desert  of  Arizona  or 
the  lumber  district  of  Michigan.  Protection  must  work  within 
the  limits  of  general  economic  advantages.  Unless  the  artifi- 
cial environment  can  be  created  at  a  comparatively  small  cost, 
it  is  economically  not  worth  creating.  But  what  is  done  at 
even  a  small  cost  artificially  will  often  come  of  itself  after  a 
time  naturally,  and  sooner  or  later  the  permanence  of  the  in- 
dustry must  rest  on  these  natural  foundations.  Just  as  the 
cotton  mills  which  do  an  export  business,  and  are  therefore 
independent  of  protection,  are  now  springing  up  in  the  South, 
so  various  industries  are  gradually  creeping  farther  West  with- 
out any  protection  against  the  long-established  enterprises  in 
the  East.  Before  the  foundation  of  the  Australian  common- 
wealth New  South  Wales  and  Victoria  pursued  opposite  poli- 
cies in  foreign  trade,  and  yet  their  industrial  development  was 
approximately  the  same.  Even  if  there  had  never  been  any 
protection  in  the  United  States,  the  time  would  undoubtedly 
have  come  when  the  mere  accumulation  of  wealth  and  the 
growth  of  population  would  have  superinduced  the  develop- 
ment of  industry. 

On  the  other  hand,  the  free  traders  fail  to  make  allowance 
for  an  important  element  in  the  problem.  The  essence  of  free 
trade  is  cosmopolitanism ;  the  essence  of  protection  is  nation- 
alism. Free  trade  holds  up  to  our  contemplation  the  ultimate 
economic  ideal,  but  fails  adequately  to  reckon  with  actual 
forces.  The  universal  republic  is  far  in  the  distance,  and  the 
separate  nations  still  have  an  important  function  to  subserve  in 
developing  their  own  individuality  and  thus  contributing  dis- 
tinctive elements  to  the  common  whole.  Legitimate  compe- 
tition presupposes,  as  we  have  seen  (§  63),  a  relative  equality 

33 


514  International  Trade.  [§  205 

of  conditions ;  as  long  as  the  growing  nations  of  the  world 
are  in  a  state  of  economic  inequality,  we  must  expect  and 
not  entirely  disapprove  the  effort  on  the  part  of  each  to 
attain  equality  by  hastening  its  own  development.  Ulti- 
mately, no  doubt,  patriotism  will  be  as  much  of  an  evil  as 
particularism  has  now  become ;  but  in  the  present  stage  of 
human  progress  patriotism  is  a  virtue.  Free  traders  often 
overlook  the  sound  kernel  in  what  seems  to  be  the  apple  of 
discord. 

As  long  as  nations  continue  to  form  the  economic  units  it  is 
not  competent  to  argue  from  internal  free  trade  to  interna- 
tional free  trade.  The  cotton  mills  in  the  South  may  injure 
their  competitors  in  New  England,  but  the  nation  will  look 
on  with  equanimity,  because  it  means  a  surplus  production 
of  wealth  within  the  country.  When,  however,  an  industry 
in  one  country  is  menaced  by  the  competition  of  another,  it 
is  no  solace  to  the  first  that  the  world's  wealth  is  being  aug- 
mented at  the  cost  of  its  own.  Nations  are  not  yet  so 
unselfish.  They  calculate  that  even  if  protection  carries  with 
it  certain  incidental  disadvantages,  they  stand  to  gain  more 
than  they  will  lose.  Even  as  an  engine  of  commercial  diplo- 
macy a  protective  tariff  is  frequently  of  service. 

In  the  main,  then,  the  conclusion  would  seem  to  be  that 
under  certain  conditions  a  protective  policy  is  relatively  defen- 
sible. It  may  be  conceded  that  in  countries  the  mass  of  whose 
exports  are  of  an  industrial  character  protection  is  unwise.  It 
may  be  taken  for  granted  that  when  nations  reach  a  state  of 
comparative  economic  equality,  protection  will  be  unnecessary 
and  even  injurious,  because  if  let  alone  each  will  then  develop 
its  own  natural  advantages.  It  cannot  be  gainsaid  that  protec- 
tion sets  loose  the  selfish  passions  of  individuals  and  classes 
and  that  it  is  responsible  for  its  share  of  political  greed  and 
unsavory  legislation.  But  when  the  economic  resources  of  a 
country  are  not  yet  fully  developed,  it  may  none  the  less  be 
desirable  to  accelerate  the  pace,  in  the  interests  of  its  own 
immediate  national  progress,  with  the  idea  that  the  contributions 


§205]  Protection  Discussed.  515 

of  fully  mature  and  economically  well-rounded  nations  to  the 
common  wealth  of  the  globe  will  in  the  long  run  exceed  the 
gain  from  an  uneven  and  one-sided  evolution. 

So  far  as  the  United  States  is  concerned  it  is  scarcely  open 
to  question  that  the  system  of  protection  has  somewhat  has- 
tened the  industrial  development  of  the  country.  It  has  not 
created  this  development,  which  was  bound  to  come  sooner  or 
later,  and  it  is  responsible  for  many  incidental  evils.  It  has 
contributed  to  political  demoralization ;  it  has  sheltered  under 
its  wing  incompetent  individuals  who  would  have  been  elimi- 
nated to  the  common  advantage  by  free  competition ;  it  is 
maintained  in  several  industries  where  it  is  no  longer  needed ; 
it  has  done  its  share  in  creating  monopoly  conditions  in  other 
industries ;  and  it  is  calculated  in  the  near  future  to  array  class 
against  class  as  the  interests  of  some  become  more  clearly  favor- 
able to  an  unrestricted  foreign  market  which  can  be  secured 
only  by  letting  down  the. bars  of  the  tariff.  And  yet  it  is  diffi- 
cult to  escape  the  conclusion  that  protection  has  been  on  the 
whole  a  wise  policy  for  the  United  States.  Without  it,  it 
would  probably  have  taken  us  somewhat  longer  to  come  to  our 
own ;  without  it  the  immense  amounts  of  capital  invested  by 
foreigners  in  starting  industries  on  this  side  of  the  tariff  wall 
would  have  been  employed  at  home,  to  that  extent  retarding 
the  diversification  of  American  industry  and  the  influences  that 
contribute  to  the  increased  efficiency  of  labor ;  without  it  the 
United  States  would  not  have  entered  so  soon  on  its  role  as  a 
world  power ;  without  it,  in  short,  the  whole  tempo  of  economic 
progress  would  have  been  slower.  To  those  who  deplore  the 
feverish  haste  of  modern  life,  this  will  serve  as  an  additional 
objection  to  protection.  To  those,  however,  who  desire  to  face 
industrial  facts  as  they  exist,  and  who  realize  that  in  the  intense 
national  rivalry  of  to-day,  to  stand  still  is  to  retrograde,  the 
efforts  of  the  statesmen  who  have  guided  the  policy  of  the 
United  States  almost  from  the  beginning  will  not  seem  to  be 
such  a  tissue  of  errors  or  such  a  chain  of  mistaken  aspirations 
as  they  are  sometimes  represented.  As  the  United  States 


516  International  Trade.  [§  205 

becomes  more  and  more  of  an  industrial  nation,  seeking  an 
outlet  for  its  manufactures,  it  is  indeed  probable  that  the  tariff 
will  be  gradually  lowered,  with  advantage  to  all ;  but  he  would 
be  a  hasty  prophet  who  would  predict  any  sudden  or  material 
change  for  a  considerable  time  to  come. 


CHAPTER   XXXI. 
TRANSPORTATION. 

206.  References. 

A.  T.  Hadley,  Railroad  Transportation  (1885);  B.  H.  Meyer,  Railway 
Legislation  in  the  United  States  (1903)  ;  H.  R.  Meyer,  Government  Regulation 
of  Railway  Rates  (1905)  ;  E.  R.  Johnson,  American  Railway  Transporta- 
tion (1903)  ;  A.  B.  Stickney,  The  Railway  Problem  (1891)  ;  H.  S.  Haines, 
Restrictive  Railway  Legislation  (1905)  ;  W.  M.  Acworth,  The  Elements  of 
Railway  Economics  (1905)  ;  F.  H.  Spearman,  The  Strategy  of  Great  Rail- 
roads (1905)  ;  C.  A.  Prouty  and  W.  D.  Hines,  The  Regulation  of  Railway 
Rates  (Amer.  Econ.  Assoc.  Publications,  3d  series,  IV,  1903)  ;  President 
Roosevelt's  Railroad  Policy,  Addresses  by  C.  A.  Prouty,  D.  A.  Willcox, 
P.  S.  Grosscup  and  F.  Parsons  (1905)  ;  F.  N.  Judson,  The  Law  of  Inter- 
state Commerce  and  its  Federal  Regulation  (1905);  E.  R.  A.  Seligman, 
Railway  Tariffs  and  the  Interstate  Commerce  Law  (Pol.  Sci.  Quart.,  II, 
1887  :  some  passages  in  this  chapter  are  reprinted  from  this  article)  ; 
F.  W.  Taussig,  A  Contribution  to  the  Theory  of  Railway  Charges  (Quart. 
Jour,  of  Econ.,  V,  1892)  ;  C.  H.  Cooley,  The  Theory  of  Transportation 
(Amer.  Econ.  Assoc.  Publications,  IX,  1894)  ;  H.  T.  Newcomb,  Observa- 
tions concerning  the  Theory  of  Railway  Charges  (Yale  Review,  IX,  1901)  ; 
Interstate  Commerce  Commission,  Railways  in  the  United  States  in  igos 
(5  vols.,  1903)  ;  United  States  Senate  Committee  on  Interstate  Com- 
merce, Hearings  in  Special  Session  (5  vols.,  1905). 

207.  Transmission  of  Intelligence  —  The  Post-Office. 

Transportation  as  an  economic  factor  includes  the  transmis- 
jsinn  of  infplligpnre  nr  wall  nr  flip  trnn<-pnrtaHrm  of  pprenns  a^ 
^orp™r>HiHf»g  The  deeper  influence  of  the  modern  media  of 
transportation  in  overcoming  the  element  of  distance  has  been 
adverted  to  above  (§  19).  The  purpose  of  this  chapter  is  to 
discuss  some  of  the  specific  problems  connected  with  actual 
charges. 

The  chief  media  of  the  geographical  transmission  of  intelli- 
gence are  the  post-office,  the  telegraph  and  the  tel 


\ 

^ 


5  1  8  Transportation.  [§  207 

Postal  service  in  classic  antiquity  was  almost  exclusively  for 
governmental  purposes.  In  the  middle  ages  it  was  largely  a 
private  enterprise  carried  on  to  serve  the  interests  of  the  mer- 
chants, as  in  the  Hanseatic  towns,  or  in  the  case  of  the  students 
living  far  from  home  at  the  Universities.  It  was  not  until  the 
seventeenth  century  that  a  regnfcr  pn«;t-al 


rated  in  Europe.  Mail  coaches  were  first  used  by  Pitt  in  1784, 
and  the  modern  postal  system  was  introduced  by  Rowland 
Hill's  reform  in  1840.  The  Jhijr  points  of  thp  rf  fr)rm  were 
/  uniformity  of  rate^enny  postage,  "prepayment  and  th^  use  of 
stamps.  Up  to  that  time  adhesive  stamps  were  virtually  un- 
known, prepayment  of  postage  was  deemed  an  insult,  and 
rates  were  graduated  according  to  distance  in  conformity  with 
the  so-called  zone  system.  In  England  the  charge  for  a  single 
thin  sheet  varied  from  4^.  for  15  miles  to  i2d.  for  300  miles. 
A  letter  weighing  two  ounces  from  London  to  Cork  cost  qs. 
\\d.  —  about  eighty  times  the  present  rate.  In  America  up 
to  1845  tne  rates  were  analogous  —  6  cents  to  25  cents  per 
single  sheet  for  distances  from  30  to  400  miles.  Hill  con- 
cluded that  the  chief  cost  was  ascribable  to  the  handling  of  the 
mails  at  both  ends,  and  the  suggestion  of  uniformity  carried  the 
other  schemes  of  improvement  with  it.  By  18^7  the  reform 
was  accomplished  in  the  United  States.  ™A  in  rSy/j  thp  int^j. 


national  post  was  inn^gqrafrp^.  The  use  of  universal  postage 
stamps  has,  however,  not  yet  been  found  practicable,  owing  to 
the  diversity  in  the  currency  systems. 

The  post-office  business  is  not  confined  to  (i)  the  trans- 
portation of  letters.  In  most  countries  it  includes:  (2)  the 
parcels  post,  (3)  the  passenger  post,  (4)  postal  money  orders, 
(5)  postal  collection  of  bills,  (6)  postal  savings  banks,  (  7  )  pos- 
tal telegraph  and  (8)  postal  telephone.  In  the  United  States 
all  these  additional  functions,  except  the  fourth  and  to  a  minor 
extent  the  second,  are  in  private  hands.  But  notwithstanding 
the  restricted  scope  of  the  American  post,  the  factors  of 
national  wealth,  popular  intelligence  and  immense  distances 
have  combined  to  make  the  postal  transactions  of  the  United 


§  207]       Transmission  of  Intelligence.          519 

States  by  far  the  most  important,  not  only  absolutely,  but  rela- 
tively to  population.  The  expenditures  for  1904  were  over 
$150,000,000,  involving  a  deficit  of  about  $6,500,000,  due 
partly  to  the  growing  demands  for  rural  free  delivery,  and 
partly  to  the  misuse  by  book  publishers  of  the  low  rates  on 
periodicals. 

Postal  charges  are  usually  based  upon  the  principle  of  joint 
cost  (§  107).  This  involves  the  principle  of  particular  value 
of  service,  as  modified  by  general  cost  of  service.  Letters 
pay  more  than  merchandise,  merchandise  more  than  books, 
books  more  than  newspapers.  Were  the  rates  primarily  based 
on  particular  cost,  they  would  be  inverted,  for  it  obviously  costs 
more  to  transport  a  newspaper  than  a  light  letter.  The  higher 
letter  rate  is  imposed  on  the  principle  that  inasmuch  as  the 
entire  cost  of  the  postal  service  must  somehow  be  met,  the 
letters  can  better  afford  to  make  a  substantial  contribution  to 
this  end  than  the  newspapers.  The  receipt  of  the  letter  is 
worth  more  to  the  average  correspondent  than  the  receipt  of 
the  newspaper  to  the  average  subscriber.  It  is  the  value,  not 
the  cost,  of  the  service,  which  is  the  controlling  factor.  Cost  of 
service  enters  only  as  a  minor  ingredient,  for  letter  rates  in- 
crease with  weight,  speed  and  risk,  in  case  of  excess  postage, 
special  delivery  and  registered  mails. 

Th,.      co.^-k^Hc;     gonri     Jn     fl     mndiflH    ™ny    nf     fnlr^ph      ^ 

tplppjirmp  rharg^g  Newspaper  telegraph  rates  are  lower  than 
ordinary  rates ;  business  telephone  rates  lower  than  residential 
rates.  In  only  one  important  respect  is  there  a.  Difference. 
The  telegraph  and  telephone  charges  in  America  are  still  ral- 
r.nlated  according  to  the  zone  system,  long  since  abandoned 
in  frhf>  pflpt-nfflrp.  This  is  HUP  in  pnri-  tcf  t-^e  fart  that  t;he  dis- 
tance element  in  cost  is  greater  in  the  telegraph  and  telephone 
than  in  the  post,  but  chiefly  to  the  fact  that  the  former  are  stilL 
conducted  by  private  enterprises  on  the  principle  of  maximum 
profits  rather  than  of  the  greatest  social  utility.  The  question 
of  government  ownership  will  be  discussed  later  (§  223). 


520  Transportation.  [§  208 

208.   Railway  Development. 

Of  the  modern  media  of  transportation  the  railway  is  the 
one  that  presents  the  most  difficulties.  Canals,  which  devel- 
oped in  England  and  America  at  the  end  of  the  eighteenth  and 
the  beginning  of  the  nineteenth  century,  have  lost  their  origi- 
nal function  as  the  chief  artificial  medium  of  transportation, 
and  are  now  of  importance  only  in  exceptional  cases  like  the 
Erie  and  the  Panama  canals ;  or  where,  as  in  some  of  the 
European  countries,  they  are  links  between  rivers  or  between 
the  rivers  and  the  sea. 

When  Solomon  de  Cause  first  advanced  the  idea  of  employ- 
ing steam  as  a  propelling  power  in  1615,  he  was  shut  up  in  the 
mad-house  as  a  hopeless  maniac.  Two  centuries  later,  in 
1812,  when  Colonel  Stevens  of  Hoboken  proposed  to  build  a 
steam  railway  at  far  less  cost  than  the  projected  Erie  Canal,  he 
was  regarded  as  absurdly  visionary  and  somewhat  demented. 
And  yet  to-day,  almost  within  the  short  space  of  a  human  life, 
we  have  a  vast  network  of  over  half  a  million  miles  of  iron 
roads  encircling  the  civilized  world,  considerably  over  one- 
third  ofywhich  are  found  in  the  United  States.  The  table  on 
the  opposite  page  shows  the  railroad  mileage  of  the  world  by 
countries  in  1903. 

In  the  United  States  the  railway  mileage  was  23  in  1830; 
2,818  in  1840;  9,021  in  1850;  30,626  in  1860  and  52,922 
in  1870.  The  tables  on  pages  522  and  523  will  give  the  salient 
details  of  the  railways  of  the  United  States  since  1875. 

In  Europe  the  railways  were  built  to  accommodate  exist- 
ing traffic;  in  America  they  were  constructed,  for  the  most 
part,  to  create  new  traffic.  In  Europe  the  railway  was  the 
result  of  civilization,  in  America  an  outpost  or  harbinger  of 
civilization,  —  a  difference  which  has  led  to  three  important 
results : 

(i)  The  cost  of  railways  in  America  is  far  lower  than  in 
Europe.  In  a  new  country  the  right  of  way  is  inexpensive,  the 
terminals  acquire  value  largely  as  a  result  of  the  railway  itself. 


§    208] 


Railway  Development. 


521 


Moreover  the   exigencies  of  business  do  not  necessitate  the 
solidity  of  construction  that  is  required  in  older  communities. 


EUROPE. 
Germany  
Russia,  (in  Europe) 

33,490 

3">  14.6 

NORTH  AMERICA. 
United  States  .  . 
Canada  

207,604 
18,868 

2A  24Q 

Mexico  

0,244 

Great    Britain   and 
Ireland  
Italy  
Spain   

22,152 
9,960 
8,^80 

SOUTH  AMERICA. 
Argentine    .... 
Brazil  

11,000 

0,770 

i  t:88 

Chili 

2,800 

ASIA. 

/O00 
77  28? 

SUMMARY. 
North  America  . 
Europe  .  . 

237,659 

1  7Q  ^62 

India 

2  C  Q7I 

Asia  

7  S«4QI 

Taoan 

4,116 

South  America    . 

29,122 

China 

2  8OO 

Australasia    .  .  . 

16.072 

Africa    

11,984 

Total 

550,710 

These  conditions  are  reflected  in  the  following  table  of  average 
cost  of  railways  per  mile  : 


England  

$  1  9O,OOO—  $2  IO  OOO 

France      

I5O,OOO—    I9O,OCO 

Belgium 

1  10  ooo—  1^5  ooo 

Germany 

100,000—  105  ooo 

United  States    ...          .... 

60  ooo—     65  ooo 

• 

(2)  The  desire  of  the  new  communities  to  secure  additional 
facilities  led  to  the  adoption  in  the  United  States  of  the  com- 
petitive method  in  building  railways,  whereas  in  Europe  it  was 
recognized  from  the  outset,  or  soon  realized,  that  one  railway 
between  two  points  could  in  many  cases  perform  as  efficient 
service  as  two  or  three.  .  What  occurred  at  an  early  date  in 
Europe  is  in  process  of  accomplishment  in  the  United  States. 
The  American  railways  are  being  rapidly  consolidated  into 
large  groups,  each  of  them  serving  a  particular  section.  In 


$22 


Transportation. 


[§  208 


Total  Cost 
Constructi 
per  Mile. 


otal  Liabilities,  exce 
urrent  Accounts  an 
Sinking  Funds. 


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§  2o8]  Railway  Statistics.  .    523 


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524  Transportation.  [§  209 

the  table  on  page  525  will  be  found  the  details  of  this  process 
as  it  had  developed  in  1905,  with  the  existence  of  five  groups 
each  of  about  20,000  to  30,000  miles  in  length  and  with  several 
others  in  process  of  formation. 

(3)  In  the  United  States  the  existence  of  keen  competition, 
of  rapid  improvements  in  facilities,  and  above  all  of  the  growth 
of  the  long-distance  traffic  have  conspired  to  bring  about  a  re- 
markable progressive  reduction  in  freight  rates  during  the  past 
thirty  years.  The  facts  are  represented  on  the  chart  opposite 
page  524.  As  we  have  learned,  moreover,  from  the  table 
on  page  523,  the  earnings  have  nevertheless  increased  faster 
than  the  mileage.  There  is  now,  however,  a  probability  that 
this  reduction  has  well-nigh  reached  its  limit,  and  in  fact  since 
1900  there  has  been  a  slight  advance. 

209.  Nature  of  Railway  Business. 

The  railway  business  possesses  three  distinctive  character- 
istics :  it  is  more  than  a  mere  private  undertaking ;  it  tends  in- 
evitably to  become  a  monopoly ;  and,  as  in  all  large  enterprises 
where  the  proportion  of  fixed  capital  is  relatively  great,  there  is 
a  somewhat  peculiar  relation  of  constant  to  variable  expenses. 

(i)  When  investors  put  their  money  into  a  railway,  they 
are  in  a  sense  its  owners.  But  a  railway  is  not  like  a  shoe 
factory.  The  state  grants  to  a  railway  corporation  some  of  its 
own  sovereign  powers,  as  the  right  of  expropriation  of  private 
property ;  it  regards  the  railway  as  its  agent,  and  in  return 
insists  upon  a  large  measure  of  responsibility  to  the  public. 
Even  the  private  railway,  therefore,  is  a  quasi-public  institution. 

Railway  rates  and  fares  may  hence  be  regarded  from  two 
different  standpoints.  In  so  far  as  a  railway  is  a  business  cor- 
poration, it  is  a  private  matter :  it  may  construct  its  tariff  in 
accordance  with  general  business  principles ;  it  will  endeavor 
to  subserve  primarily  the  interests  of  its  owners.  It  will  strive 
for  the  greatest  possible  profits ;  and  this  course  is  legitimate 
and  praiseworthy.  .But  in  so  far  as  the  railway  forms  the 
public  highway,  it  is  a  public  matter :  the  objective  point  now 


§  209] 


y  Co 

Miles. 
7,4" 

nsolidation. 

GOULD  GROUP  —  continued. 
St.  Louis  and  Southwestern 
International      and      Great 

525 

Miles. 

i,3°9 
II  ro 

Denver  and  Rio  Grande 
Missouri,  Kansas  and  Texas 
Wabash                       .     .     . 

2,460 

3>°43 
2,^16 

1,259 
'.936 
392 
2,146 
1,393 

641 

Rio  Grande  Western  . 

HILL  GROUP  : 
Great  Northern      .... 
Northern  Pacific    .... 
Chicago,      Burlington      and 

645 

5>95r 
6,036 

8  T78 

4,229 

ROCK  ISLAND  SYSTEM  : 
Rock  Island 

1,201 

3°7 
132 

97 
87 

St.  Louis  and  San  Francisco 

INDEPENDENT  SYSTEMS  : 
Chicago,  Milwaukee  and  St. 
Paul                    .... 

5>I07 
7i  *3° 

Atchison,  Topeka  and  Santa 
Fe   

8,300 

5,55° 

Cincinnati,    Hamilton     and 
Dayton      .          .... 

4  04^ 

5.594 
9,261 

973 

10,605 
4,442 
1,769 

Seaboard  Air  Line      .     .     . 
Colorado  Southern      .     .     . 
Chicago  and  Great  Western 

SUMMARY: 
Vanderbilt  Group  .... 
Morgan  Group       .... 
Harriman  Group    .... 
Pennsylvania  Group  .     .     . 
Gould  Group 

2,811 

1,911 

i,474 

19,342 
30,600 
2i,378 
20,076 

IQ  IQ2 

1,671 

Hill  Group 

20  T,6i 

553 

Rock  Island  System    .     .. 
Independent  Systems 

12,366 
24,729 

Total     

169,048 

645 
391 

Small  roads  

4Q  OOO 

6,234 
1,826 

Aggregate  mileage  about 

2l8,OOO 

VANDERBILT  GROUP  : 

New  York  Central  Lines     . 
Chicago  and  Northwestern   . 

MORGAN  GROUP: 
Southern  Railway      .     .     . 
Mobile  and  Ohio    .... 
Queen  and  Crescent    .     .     . 
Central  of  Georgia      .     .     . 
Georgia  Southern  and  Florida 
Philadelphia  and  Reading  1 
Lehigh  Valley 

Central  of  New  Jersey     .     . 

Atlantic  Coast  Line  (in- 
cluding Plant  System)  .  . 

Nashville,  Chattanooga  and 
St.  Louis 

Georgia  Railroad  .... 

Western  of  Alabama  .     .     . 

Macon  and  Birmingham 

Atlanta  and  West  Point 

HARRIMAN  GROUP  : 

Illinois  Central       .... 

Union  Pacific  System  (in- 
cluding Oregon  R.  R.  and 
Navigation  Co.  and  Oregon 
Short  Line) 

Southern  Pacific     .... 

Chicago  and  Alton      .     .     . 

PENNSYLVANIA  GROUP  : 
Pennsylvania  System 
Baltimore  and  Ohio  System 
Norfolk  and  Western       .     . 
Chesapeake  and  Ohio  l    .     . 
Buffalo,  Rochester  and  Pitts- 
burg      

Western     New    York    and 

Pennsylvania      .... 

Long  Island 

GOULD  GROUP : 

Missouri  Pacific     .     .     .     , 
Texas  and  Pacific  .... 

i  Some  of  the  stock  of  the  Chesapeake  and  Ohio  and  of  the  Reading  is  owned 
by  the  New  York  Central. 


526  Transportation.  [§  209 

is  the  general  welfare ;  it  aims  not  at  the  greatest  possible 
profits,  but  at  the  greatest  possible  benefits;  it  looks  not  at 
the  interests  of  its  owners,  but  at  the  interests  of  the  public. 
Theone  point  of  view  is  individual,  the  other  is  social. '  The 
modern  railway  corporation  shares  boih  these  characteristics  : 
its  nature  is  hybrid.  To  subordinate  the  public  to  the  private 
element  is  plainly  inadmissible.  Entirely  to  engulf  the  private 
in  the  public  element  is  equally  unfair,  so  long  as  the  railway 
is  not  owned  by  the  state.  In  the  United  States  two  princi- 
ples, at  all  events,  have  been  firmly  established  during  the  last 
generation.  The  one  is  that  the  railway  is  more  than  a  mere 
private  business ;  the  other  is  that  the  capital  invested  by 
private  individuals  in  railway  enterprises  does  not  lose  its 
claim  to  a  just  remuneration  or  to  equal  protection  before 
the  law  because  of  the  fact  that  the  railway  is  a  quasi-public 
institution.1 

(2)  The  railway  tends  sooner  or  later  to  become  a  mo- 
nopoly. So  far  as  the  local  traffic  is  concerned,  this  is  true 
from  the  outset.  The  chief  consideration  here  is  the  possibility 
of  increasing  production  without  proportionate  increase  of  plant 
or  capital.  The  traffic  on  a  railroad  may  be  doubled  without 
the  necessity  of  duplicating  roadbed,  track,  terminals  and 
general  expenses.  Several  lines  paralleling  each  other  at  every 
point  would  not  benefit  the  public  and  would  certainly  ruin 
each  other.  But  even  in  long-distance  traffic  much  the  same 
is  true.  The  theory  of  the  beneficence  of  competition  depends 
on  the  postulate  of  the  transferability  of  capital.  In  case  of 
failure  the  unsuccessful  competitor  deserts  the  enterprise,  but 
the  railway,  once  started,  has  come  to  stay ;  it  may  change 
hands,  but  it  will  not,  and  in  many  states  it  cannot,  be  aban- 
doned. A  bankrupt  individual  may  be  disregarded  as  a  com- 
petitor ;  a  bankrupt  railway  is  a  more  dangerous  competitor 
than  before,  because  the  receiver  need  not  earn  anything  to 

1  These  leading  cases  were   the  Granger  Cases  (Munn  v.  Illinois), 
94  U.  S.  113  (1876),  and  the  Nebraska  Rate  Cases  (Smith  v.  Ames),  169 
.U.S.  466  (1898). 


§  209]  Railway  Competition.  527 

pay  interest  or  dividends.  There  is  hence  every  inducement 
for  the  railways  to  prevent  competition ;  and  the  attempts  will 
vary  from  more  or  less  loose  agreements  to  complete  consoli- 
dation. As  Gladstone  said  at  the  time  of  the  English  discus- 
sion in  1844  :  competition  between  railways  is  like  a  lovers' 
quarrel :  breves  inimicitiae,  amidtiae  sempiternae.  Moreover, 
this  tendency  cannot  be  permanently  arrested  by  legislation. 
We  may  prohibit  railway  combinations,  but  we  cannot  prevent 
them.  If  we  make  them  illegal,  we  simply  make  them  secret, 
or  cause  them  to  change  their  form. 

The  public  again  profits  in  some  respects  no  less  than  the 
railways.  The  curse  of  free  building  of  American  railways  has 
been  the  system  of  parallel  and  often  needless  lines.  An  addi- 
tional road  between  two  terminal  points  frequently  represents 
so  much  wasted  capital,  and  the  necessity  of  earning  profits  on 
this  swollen  capital  aggravates  the  burden  on  the  public. 
Competition  between  railways  is  supposed  to  be  responsible 
for  the  facilities  and  low  charges  of  American  railways  :  in 
point  of  fact  its  influence  has  been  much  exaggerated.  The 
competition,  while  it  lasts,  is  of  a  desperate  character,  and  each 
line  strains  itself  to  the  utmost  to  secure  the  business  that  is 
often  sufficient  only  for  one.  Charges  may  indeed  be  lowered 
temporarily,  but  the  strenuous  effort  to  secure  traffic  gives  birth 
to  the  very  worst  abuses  of  railway  management,  —  secret  per- 
sonal discriminations  and  immoderate  local  discriminations. 
The  changes  are  violent,  the  conditions  unstable.  Reduction 
of  rates  is  sometimes  carried  to  such  a  point  that  not  even 
operating  expenses  are  met.  The  railway  wars,  which  are  the 
logical  and  extreme  manifestation  of  railway  competition, 
exhaust  the  companies  and  afford  but  a  dubious  relief  to'  the 
public.  Lowness  of  charge  is  outweighed  by  instability  of 
charge.  The  reduction  itself  is,  moreover,  of  an  ephemeral 
character.  Continuance  of  low  rates  means  universal  railway 
bankruptcy ;  escape  from  ruin  is  possible  only  through  com- 
bination. If  competition  -be  beneficial  to  the  public,  it  is  a 
temporary  benefit ;  if  railway  wars,  on  the  other  hand,  throw 


528  Transportation.  [§  210 

trade  into  confusion  and  engender  the  most  aggravated  abuses, 
the  cessation  of  competition  is  a  booh  to  the  public.  As  was 
pointed  out  in  §  63,  competition  in  ordinary  business  is  the 
"  life  of  trade,"  but  competition  in  railways  might  be  called 
the  death  of  trade,  or  at  all  events  the  death  of  honest  and 
impartial  treatment  of  traders. 

(3)  Railway  outlays  are  divided  into  fixed  charges  or  inter- 
est, and  operating  expenses.  While  the  proportion  which  fixed 
charges  bear  to  total  expenses  varies  with  each  line,  it  may  be 
said  roughly  that  it  is  usually  from  forty  to  fifty  per  cent.  In 
other  words,  well-nigh  half  the  expenses  are  constant  or  inva- 
riable. They  do  not  change  with  the  amount  of  business 
transacted. 

The  operating  expenses  are  divided  into  (a)  maintenance 
of  way  and  stations,  (<£)  maintenance  of  equipment,  (<r)  con- 
ducting of  transportation  and  (d)  general  expenses,  such  as 
office,  law  and  insurance  expenses.  Of  these  (c}  and,  to  a 
smaller  extent,  (&)  fluctuate  almost  in  proportion  to  business 
transacted ;  but  (a)  and  still  more  (d)  will  change  only  very 
slightly  with  the  traffic.  The  proportion  of  each  of  these  four 
classes  to  the  whole  will  vary  with  the  widely  different  charac- 
teristics of  each  line ;  but  it  may  be  safely  affirmed  that  in 
general  about  one-half  of  the  operating  expenses  are  constant 
or  invariable. 

The  total  constant  expenditures  of  a  railway  are  thus  the 
fixed  charges  plus  one-half  the  operating  expenses.  In  other 
words,  a  large  majority  of  railway  expenses  are  irrespective  of 
the  amount  of  business.  They  remain  the  same,  notwithstand- 
ing the  increase  or  decrease  of  the  traffic.  The  effect  of  this 
state  of  things  on  the  determination  of  actual  rates  will  be  seen 

in  §  211. 

210.  Principle  of  Railway  Charges. 

Whether  the  railway  be  owned  by  the  state  or  by  a  private 
corporation,  there  must,  up  to  a  certain  point  at  least,  be  a 
similarity  in  the  principle  of  charge.  For  the  interests  involved 
are  so  enormous,  and  the  particular  benefits  to  the  patrons  so 


§  210]  Railway  Charges.  529 

separable,  that  no  country  has  yet  proposed  to  run  its  railways 
free  or  below  cost.  Some  states  like  Prussia  make  large  profits 
out  of  their  government  railways ;  others  as  in  Australia  en- 
deavor just  to  cover  the  cost ;  but  none  has  attempted  to  make 
up  a  railway  deficit  by  taxation. 

The  principle  sometimes  advanced  as  an  ideal  is  that  of  cost 
of  service.  A  fair  criterion  in  ordinary  commodities  is  cost  of 
production ;  why,  it  is  asked,  should  it  not  be  applied  to  rai\- 
way  transportation? 

(1)  Obviously,  however,  this  cannot  mean  the  cost  of  the 
particular-service.    In  the  first  place,  such  costjs-impossible  of 
ascertainment.     There  is  a  wide  disparity  in  the  cost  of  car- 
riage on  the  same  line  according  to  the  changing  conditions 
under  which  the  service  is  performed.    Atone  time  the  greater 
portion  of  the  freight  may  be  carried  over  the  whole  line ;  at 
another  the  local  business  may  outweigh  the  through  traffic,  so 
that  the  capacity  of  the  rolling  stock  is  not  fully  utilized.      Ajt 
one  time  the  traffic  may  move  in  great  part  in  one  direction 
and  the  number  of  "  empties  "  returned  may  be  abnormally 
large ;  at  another  time  there  may  be  far  more  back- loading 
and  a  more  even  distribution  of  traffic.    At  one  time  the  trains 
may  be  started  with  full  loads;  at  another,  they  may  be  half 
filled.     The  proportion  of  paying  freight  to  dead  weight,  or 
the  amount  of  the  tare,  is  of  considerable  importance.     So  that, 
even  if  it  were  feasible  to  construct  a  tariff  based  on  the  cost 
of  service  of  each  particular  transaction,  it  would  be  of  no  avail 
unless^ the^amouht  of" fi tight  luTrtained  an  unalterable  quantity. 

(2)  Secondly,  if  rates  were  based  on  cost  of  service,  most 
of  the  work  performed  by  the  railways  would  come  to  a  stand- 
still.    It  costs  immensely  more  to    transport  a  given  value  of 
heavy  goods  like  coal  than  an  equal  value    of  silk.     If  rates 
were  fixed  according  to  cost  of  carriage,  the  expense  of  con- 
veyance would  so  vastly  exceed  the  prime  cost  of  the  coal  as 
effectually  to  bar  its  use  except  in  the  immediate  neighborhood 

f  the  mines.      In  the  same  way  it  costs  so  much  more  to  bring 
neat  from  North  Dakota  to  New  York  than  from  Troy  to  New 

3* 


53°  Transportation.  [§210 

York,  that  unless  a  lower  ton-mile  rate  was  granted  on  the  North 
Dakota  business,  there  would  be  no-  market  for  it  at  all  in  New 
York.  Individual  cost  of  service  can  hence  not  possibly  be  a 
criterion  of  railway  charges. 

(3)  If  therefore  anything  is  meant  by  cost,  it  must  be  joint 
cost.  As  we  have  seen,  however,  in  our  general  discussion  of 
value,  joint  cost  refers  only  to  the  cost  of  all  the  services  in  the 
aggregate,  and  affords  no  criterion  as^to  tlie_principle  govern- 
ing the  separate  services.  To  ascertain  this  we  must  revert  to 
an  anterior  law  of  value,  namely,  the  law  of  marginal  utility. 
In  other  words,  the  principle_of  charges  is  notjhe  cost  of  the 
individual  service,  but  the  value  ofthe  individiial  service* 

The  object  of  a  railway  is  to  increase  its  ^traffic  and  to  de- 
crease its^xpenses.  This  it  finds  can  be  best  attained  by  lower- 
ing the  charges  on  certain  classes  of  goods,  or  on  the  same 
classes  to  different  localities.  But  this  is  equivalent  to  saying 
that  what  influences  the  manager  is  not  the  cost,  but  the  value, 
of  the  service.  This  practice  in  railway  parlance  is  called 
"  charging  what  the  traffic  will  bear,"  —  an  unfortunate  ex- 
pression, and  liable  to  much  misconception.  If  we  mean  by 
the  principle  "  charging  what  the  traffic  is  able  to  bear,"  it  is 
correct ;  but  if  we  mean  "  charging  what  the  traffic  can  be 
made  to  bear,"  it  is  incorrect.  Charging  what  the  traffic  will 
bear,  rightly  understood,  simply_  serves  as  an  excuse  for  re- 
ducing rates  on  low-class  traffic  because  it  cannot  bear  higher^ 
rates.  The  phrase  is  a  bad  one,  because  it  may  be  twisted 
into  meaning  that  the  greatest  possible  charges  on  high-class 
goods  are  also  legitimate.  Correctly  interpreted,  it  justifies 
lower  charges  on  certain  kinds  of  business ;  incorrectly  inter- 
preted, it  seems  to  justify  extortionate  charges  on  other  kinds 
of  business. 

The  attempt  to  make  the  theory  of  joint  cost  the  funda- 
mental explanation  of  railway  rates  is,  moreover,  erroneous  for 
another  reason.  Prices  are  fixed  at  the  point  of  cost  of  pro- 
duction or  joint  cost,  as  we  know,  only  when  the  products  are 
competitive  products.  There  is  always  a  marginal  producer 


§  2io]      Principle  of  Railway  Charges.         531 

who  sells  at  cost  price  without  any  profit.  But  in  monopolies 
there  is  no  marginal  producer,  and,  as  we  have  seen  (§  no), 
the  relation  of  price  to  cost  is  far  more  indirect.  Price  may 
be  continually  above  cost,  the  difference  being  the  monopoly 
profits.  Price  in  such  cases  is  fixed  according  to  the  principle 
of  monopoly  maximum  returns,  which  is  nothing  but  charging 
what  the  consumer  can  afford  to  pay.  The  charges  on  each 
monopoly  by-product  will  be  put  at  the  highest  price  consist- 
ent with  greatest  sales  or  profits,  and  not  necessarily  propor- 
tionate to  cost  of  production.  As  we  have  learned  in  the  last 
paragraph,  however,  a  railroad  is  in  the  long  run  a  monopoly. 
Railway  charges,  therefore,  are  fixed  not  by  any  principle  of 
cost,  but  by  the  principle  of  monopoly  profits,  that  is,  charg- 
ing what  the  traffic  will  bear.  ^m 

This  also  explains  the  analogy  that  is  frequently  drawn  be- 
tween railway  charges  and  taxation,  with  the  idea  of  ability  or 
capacity  to  pay.  Taxation  is  compulsory,  but  payment  for  a 
monopoly  of  a  necessity  of  life  (like  railroad  charges  in  the 
present  stage  of  business  activity)  is  in  one  sense  equally  com- 
pulsory. The  principle  of  charging  what  the  traffic  will  bear, 
in  any  monopoly,  has  reference  to  the  ability  of  the  patron  to 
pay.  The  monopolist  is  indeed  not  moved  by  ethical  consid- 
erations, but  the  price  that  he  charges  depends  upon  what  the 
purchaser  can  afford  to  pay.  Justice  in  taxation  requires  that 
a  man  shall  pay  in  some  proportion  to  what  he  can  afford  :  frhe 
fixing  of  monopoly  price  depends  on  what  he  thinks  he  can 
afford  :  at  bottom,  there  is  a  real  analogy  between  the  cases. 

Some  object  to  the  value  of  service  principle  as  the  ex- 
planation of  railway  rates,  because  they  hold  that  value  means 
intrinsic  utility  and  grain  and  coal  would  then  be  charged 
more  than  silks  and  spices^This  is  to  revert  to  the  old  fallacy 
that  value  ancLutility  are  identical.  The  slightest  acquaintance 
with  the  modern  theory  &f  value  suffices  to  dispel  this  objec- 
tion. When  we  say  that  railway  rates  are  fixed  by  value  of 
service,  we  mean  that  the  marginal  utility  of  the  service  is 
definitely  estimated  by  the  shipper ;  that  if  the  rate  exceeds 


532  Transportation.  [§211 

this  estimate,  the  commodity  will  not  be  sent;  and  that  a 
different  estimate  may  be  put  on  each  shipment  or  commodity. 
The  marginal  utility  of  the  service  fixes  the  prices  of  all 
commodities ;  but  it  is  only  in  the  ease  of  competitive  pro- 
duction that  this  is  equivalent  to  joint  cost.  Thus  the  theory 
of  joint  cost,  in  so  far  as  it  is  true  at  all,  is  a  subordinate  part 
of  a  more  general  rule ;  and  to  the  extent  that  the  railroad  is  a 
monopoly,  the  theory  becomes  less  and  less  true.  The  dis- 
pute will  easily  be  avoided  as  soon  as  it  is  recognized  that 
cost  of  service  or  joint  cost  is  simply  a  variation  of  value 
of  service,  and  that  the  theory  of  marginal  utility  (which  is 
nothing  but  value  of  service)  is  the  fundamental  explanation 
not  only  of  railroad  charges  but  of  all  prices. 

211.   Classification. 

Charging  according  to  what  the  service  is  worth  results  in 
the  two  fundamental  principles  of  classification  and  discrimi- 
nation. Classification  is  due  to  the  fact  that  the  same  service/ 
has  a  varying  value  when  rendered  to  different  commodities. 
Discrimination  (/.  e.  local  discrimination)  is_due  to  the  fact 
that  the  same  service  has  a  varying  value  when  rendered  to 
different  places.  Whether  the  same  service  has  a  varying 
value  for  the  freight  of  different  persons,  and  may  thus  give 
rise  to  personal  discrimination,  is  a  question  to  be  treated  by 
itself. 

Value  of  sejyice, influences  classification  in  a  double  way, — 

puts  the  same  articles  intocTitterent  classes,  it  puts  different 
articles  into  different  classes.  The  first  method  is  illustrated 
by  the  distinction  between  freight  and  express  traffic.  In  the 
United  States  the  general  classification  applies  only  to  freight 
traffic.  In  the  rest  of  the  world,  where  separate  express  com- 
panies are  unknown,  the  rates  are  classified  according  to  this 
distinction,  as  in  England,  where  they  are  known  as  goods  and 
parcels  rates.  In  the  same  way  passenger  fares  on  express 
trains  are  often  higher  than  on  ordinary  trains. 

Far  more  important,  however,  is  the  classification  of  different 


§  2ii]  Classification  of  Freight.  533 

articles  into  different  categories.  Cost  of  service  indeed  in-  / 
fluences  classification  to  a  minor  extent  in  so  far  as  the  articles 
differ  in  bulk,  shape,  risk,  direction,  or  regularity  of  shipment, 
or  as  passengers  use  a  Pullman  or  a  plain  coach.  Actual  rates, 
however,  are  mainly  influenced  not  by  cost  of  service,  but  by 
what  the  service  is  worth.  The  main  point  is  the  development 
of  the  traffic.  We  must  keep  in  mind  the  distinction  drawn  in 
§  209  between  the  constant  and  the  variable  expenses.  If  the 
freight  or  the  cneap  passenger  business,  like  immigrant  traffic, 
can  be  Secured  at  rates  which  will  more  than  cover  the  variable 
expenses,  —  the  actual  hauling  and  a  proportionate  part  of  the 
station 'expenses, —  it  will  pay  the  road  to  take  this  business, 
because  a  contribution,  however  small,  is  thereby  made  to  fixed 
expenses.  These  would  have  to  be  met  at  all  events.  A  small 
contribution  to  constant  expenses  is  better  than  none  at  all. 
Yet  to  apply  this  low  rate  to  all  business  would  ruin  the 
company. 

Classification  again  benefits  the  public.  The  meagre  surplus 
over  hauling  expenses  on  the  cheap  goods  contributes,  if  ever  • 
so  little,  to  the  fixed  expenses,  and  diminishes  to  this  extent 
the  amount  which  it  is  necessary  to  raise  from  the  remaining 
traffic.  If  we  had  no  classification,  not  only  would  we  not 
have  cheap  meat  and  cheap  wheat,  but  the  charges  on  the  dear 
goods  would  be  higher.  It  reduces  the  rates  on  the  cheap 
goods  immensely  and  the  rates  on  the  dear  goods  moderately. 
The  principle  of  classification  is  the  first  corollary  from  the 
distinction  between  constant  and  variable  expenditures  . 

To  uphold  the  legitimacy  and  necessity  of  classification  is, 
however,  quite  another  thing  from  attempting  to  palliate  unde- 
niable abuses.  Classification  plays  only  a  very  slight  role  in  * 
passenger  traffic  because,  especially  in  democratic  countries, 
one  man  is  considered  as  good  as  another ;  but  the  freight 
classifications,  most  of  which  have  grown  up  in  a  hap-hazard 
way,  are  full  of  inconsistencies.  There  are  tw^jgroblenis  in 
freight  classification,  —  to  secure  uniformity  between  different 
railways  and  to  secure  uniformity  between. shippers. 


534  Transportation.  [§211 

(1)  At  the   outset   every  road   had  its  own  classification. 
With  the  growth  of  consolidation  and  agreements  classifica- 
tions   applicable   to    connecting    and    competing   roads    were 
elaborated.     In  a  small  country  like  Italy  it  has  been  found 
possible  to  construct  a  uniform  tariff  for  the  entire  country. 
In  the  United  States  the  difficulties  arising  from  the  conflicting 
interests  of  different  sections   have   been   found   insuperable. 
The  South  demands  a  specially  low  rate  on  cotton,  the  West 
on  wheat,  the  Pacific  slope  on  fruit,  and  so  on.     There  are 
now  four  chief  classifications,  —  the  official  (in  the  North  and 
East),  the   Southern,  the  Western,  and  the  Transcontinental 
classifications.     Cotton  piece  goods,  for  instance,  are  in  class 
one  in  the  Western,  in  class  three  in  the  official,  and  in  cLass 
five  in  the  Southern  classifications.     What  the  railroads,  how- 
ever, are  not  able  to  accomplish  by  mutual  agreement  will 
probably  be  effected  in  no  distant  future  by  legislation.1     If 
this  is  done,  howgjner,  the  greatest  care  will  have  to  be  taken, 
when  prescribing  a  national  classification,  to   provide  for  an 
adequate  number  of  special  or  commodity  rates  outside  of  the 
regular  classes. 

(2)  The  American  classifications,  although  far  superior  to 
those  of  a  few  decades  ago,  are  still  often  lacking  in  uniformity, 
in  stability  and  in  justice.     If  the  railway  is  a  quasi-public  in- 
stitution, these  wide  powers  of  fixing  the  classes  cannot  be  put 
in  the  hands  of  private  individuals  or  corporations  as  sole  arbi- 
ters.   To  imply  with  many  of  our  eloquent  railway  officials  that 
there  is  'an  identity  of  interests  between  the  railway  and  the 
shippers 'is  unfortunately  not  borne  out  by  experience.      To 
demand,  on  the  other  hand,  a  rigid  law  prescribing  all  details 
would  impute  to  our  legislators  a  knowledge  which  they  cannot 
possess.     To    cure  the   abuses   of  classification   by   Congress 
designating  administrative  agents  who,  under  the  spoils  system, 
shall  fix  the  classification,  would  be  a  jump  from  the  frying  pan  j 

1  A  history  of  the  attempts  to  secure  a  national  classification  will  be  1 
found  in  Interstate  Commerce  Commission  Reports,  second-,  fourth,  and  ] 
eleventh  reports. 


§  212]  Personal  Discrimination.  535 

into  the  fire.  An  escape  from  the  dilemma  seems  to  be  outlined 
in  the  principle  of  advisory  boards  or  consultative  councils, 
which  have  been  established  in  Germany,  Italy  and  Japan. 
These  councils  represent  the  commercial  interests,  and  the 
classification  finally  adopted  is  the  result  of  a  conference,  and 
often  a  compromise,  between  the  shippers  and  the  railways. 

212.   Personal  Discrimination. 

As  opposed  to  classification  a  discrimination  may  be  defined 
as  an  inequality  in  the  charge  for  hauling  a  like  quantity  of 
similar  articles  or  individuals  for  an  equal  distance  in  the  same 
manner.  All  discrimination  is  either  personal  or  local. 

While  differences  in  rates  based  on  classification  are  in  a 
sense  legitimate,  it  is  impossible  to  find  any  principle  on  which 
to  base  personal  discriminations.  Personal  discriminations  in 
passenger  fares  take  the  form  of  free  passes  ;  personal  discrim- 
inations in  freight  rates  occur  in  a  multiplicity  of  ways.  They 
are  beyond  doubt  the  most  flagitious  abuses  of  arbitrary  railway 
management. 

Allowance  for  quantity  or  making  a  lower  charge  for  larger* 
shipments  is  .indeed,  within  certain  limits,  defensible.  It  is  then, 
however,  really  a  matter  of  classification,  and  may  be  upheld  in 
the  same  way  as  the  distinction  between  slow  freight  and  ex- 
press business.  The  difficulty,  however,  is  to  select  the  unit 
above  which  the  rates  shall  be  the  same  to  all.  Shall  it  be  the 
pound,  hundredweight,  ton,  car  load,  cargo  lot,  or  train  load  ? 
Usually  the  car  load  is  taken  as  the  dividing  line,  and  as  such 
does  not  excite  much  dissatisfaction,  although  even  this  may 
sometimes  work  injustice  to  the  small  shipper  and  cause  inde- 
fensible preferences. 

But  if  this  comparatively  unimportant  difference  be  only 
partially  justifiable,  the  vastly  greater  discriminations  which 
cannot  even  claim  cost  of  service  as  an  ostensible  reason  are 
indefensible  on  any  theory  whatever.  To  build  up  one  man's- 
business  at  the  expense  of  another's  can  never  be  acknowledged 
a  legitimate  function  of  common  carriers.  The  railroad  ad- 


536  Transportation.  [§  2I3 

vocates  sometimes  assert  that  a  business  firm  makes  wholesale 
rates  less  than  retail  rates  and  gives  special  figures  to  different 
customers.  Why  is  not  the  same  principle  applicable,  they  ask, 
to  the  railroad  business?  They  utterly  fail  to  perceive  that  the 
railroad  is  not  simply  a  private  business,  but  a  public  trust ; 
that  a  merchant  is  not  bound  to  treat  his  customers  equally, 
but  that  a  railroad  exercises  public-  functions,  is  invested  with 
public  rights  and  therefore  has  public  duties.  The  wholesale 
principle  or  allowance  for  quantity,  when  carried  to  this  ex- 
treme, becomes  utterly  untenable. 

Personal  discriminations,  then,  cannot  be  upheld  on  any 
theory.  They  must  be  stopped  at  all  hazards.  But  how? 
Whatever  be  the  affirmative  answer,  we  are  now  prepared  at 
all  events  to  exclude  certain  negative  replies.  To  rely  on  free 
competition  as  a  remedy  is  absurd.  Personal  discriminations 
are  most  glaring  when  competition  is  most  active.  Cut  rates 
and  rebates  are  never  so  common  as  during  railway  wars.  The 
great  mass  of  personal  discriminations  are  due  not  to  the  voli- 
tion of  the  railway  managers,  but  to  the  stress  of  competition 
and  the  desire  to  attract  business.  The  Interstate  Commerce 
Law,  which  in  one  section  attempts  to  restrain  competition  by 
prohibiting  railway  pools  and  in  another  section  forbids  per- 
sonal discrimination,  is  endeavoring  to  secure  two  diametrically 
opposite  ends.  If  we  strengthen  competition,  we  inevitably 
increase  personal  discrimination. 

213.    Local  Discrimination. 

Local  discrimination  may  arise  in  two  ways,  (i)  The  road 
may  desire  to  extend  its  traffic  in  commodities  coming  from  a 
distance.  If  they  are  to  be  carried  at  all,  they  must  be  trans- 
ported at  less  than  regular  rates.  Hence  arises  the  necessity 
of  a  distinction  between  local  and  through  traffic.  Goods 
coming  from  a  distance  must  be  treated  in  the  same  manner 
as  cheap  goods.  Local  discrimination  is  like  classification. 
The  distant  freight  is  the  cheap  freight,  the  near  freight  is  the 
dear  freight.  Local  discrimination  of  this  kind  is  in  principle 


§  213]  Local  Discrimination.  537 

legitimate.  The  long-distance  traffic,  by  making  a  contribution 
to  constant  expenses,  reduces  the  local  rate  as  well.  It  is  the 
immense  long-distance  traffic  in  the  United  States  which  has 
enabled  the  American  railways  to  reduce  their  charges,  local 
as  well  as  through,  far  below  the  European  level.  The  abolition 
of  local  discriminations  of  this  kind  would  level  up,  not  level 
down. 

(2)  Local  discriminations  may  arise  from  competition  at 
the  junction  points.  The  competition  may  be  due  to  cheaper 
water  transportation,  to  a  foreign  railway  or  to  a  better  equipped 
or  shorter  domestic  railway.  A  lower  rate  to  the  competitive 
centre  is  the  sole  condition  of  the  retention  of  the  competitive 
traffic. 

It  is  sometimes  stated  that  local  discriminations  are  in  prin- 
ciple rerjrehensible  because  they  remove  geographical  advan- 
tages fand  it  is  claimed  that  the  true  principle  is  that  of  the 
equal  mileage  rate.  This  argument,  however,  is  not  convincing. 
There  is  no  such  thing  as  an  inviolable  geographical  advantage. 
There  are  no  vested  rights  in  situation.  One  town  may  be 
connected  with  the  coast  only  by  a  turnpike  ;  another  farther 
distant  may  have  the  good  fortune  to  see  a  railway  built 
through  its  limits.  Has 'the  former  any  cause  to  complain 
because  it  is  robbed  of  the  benefits  of  its  hitherto  advantageous 
situation?  The  object  of  all  improved  means  of  communica- 
tion is,  in  fact,  to  annihilate  distance,  to  minimize  differences 
in  situation.  Maintenance  of  original  geographical  advantages 
would  render  impossible  all  but  local  business  in  the  vast  mass 
of  commodities ;  it  would  again  turn  our  Western  fields  into 
barren  wastes.  Differential  rates  widen  the  field  of  supply; 
they  increase  the  specialization  of  wants  and  create  the  possi- 
bility of  satisfying  these  wants,  so  characteristic  of  modern 
society.  Opposition  to  local  discriminations  arises  from  view- 
ing solely  the  interests  of  the  producer ;  rational  economics  leads 
us  to  consider  also  the  consumer.  Opposition  to  differential 
rates  is  based  on  the '  supposed  welfare  of  a  particular  class  or 
section  of  producers;  a  wise  national  economy  will  ponder 


538  Transportation.  [§213 

over  the  interests  of  the  whole  community,  irrespective  of  sec- 
tional jealousies.  If  local  discriminations  are  so  arranged  that 
distant  producers  are  enabled  to  compete  with  local  producers, 
the  latter  may  indeed  see  their  profits  curtailed,  but  the  former 
will  see  their  profits  increased,  and  the  consuming  public  as  a 
whole  will  evidently  gain. 

This  does  not,  however,  justify  all  differential  rates.  The 
abuses  have  often  been  outrageous,  the  methods  undeserving 
of  palliation.  Local  interests  have  been  disregarded,  and  the 
discriminations  so  conducted  as  to  ruin  whole  businesses  or 
towns  in  order  to  build  up  others.  It  is  not  necessary  to  as- 
cribe illicit  motives  to  the  railway  managers.  They  have  often 
been  forced  into  unjust  discrimination  by  the  stress  of  compe- 
tition and  the  instinct  of  self-preservation.  But  railway  officials 
commit  a  great  mistake  in  calling  all  local  discriminations  just, 
because  they  are  the  effect  of  competition,  precisely  as  the 
demagogues  err  in  opposing  undeniably  valid  discriminations 
and  at  the  same  time  upholding  competition.  Competition  is 
made  to  cover  a  multitude  of  sins.  Railway  profits  and  public 
interests  do  not  always  go  hand  in  hand.  The  possible  diversity 
of  interests  renders  some  forms  of  governmental  supervision 
imperative. 

It  is  indeed  true  that,  in  the  main,  rates  should  increase 
with  distance  or  mileage.  Some  extremists  propose  to  apply 
to  railways  the  postal  principle  of  making  a  uniform  charge 
irrespective  of  distance.  This,  however,  completely  overlooks 
the  fact  that  in  the  post  the  chief  item  of  cost  is  the  handling 
at  each  end  and  that  the  expense  of  transportation  itself  is  an 
insignificant  fraction  of  the  whole ;  while  in  the  railway,  on 
the  other  hand,  a  far  greater  part  of  the  cost,  especially  in 
longer  distances,  is  the  mere  hauling  expense.  'To  disregard 
distance  would  require  such  an  immensely  high  average  rate 
as  to  make  even  wagon  transportation  cheaper  for  short 
stretches.  The  postal  principle  is  utterly  impracticable  as 
well  as  theoretically  erroneous. 

But  while  cost  increases  with  distance,  it  does  not  increase 


§  213]  Short-Haul  Laws.  539 

proportionately  to  distance,  precisely  because  of  the  relation 
of  constant  to  variable  expenses.  Hence  distance  rates  do 
not  imply,  as  some  demand,  equal  mileage  rates.  Both  the 
cost  and  the  value  of  the  service  increase  less  rapidly  than  the 
distance.  Even  in  the  relatively  simple  passenger  business 
mileage  rates  are  used  only  for  comparatively  short  distances ; 
the  fares  to  the  more  distant  competitive  centres  are  almost 
always  less  than  mileage  rates.  As  soon,  however,  as  we  have 
any  derogation  from  the  principle  of  equal  mileage,  we  have  a 
local  discrimination. 

The  simplest  limitation  on  the  practice  of  local  discrimi- 
nations is  the  enactment  of  the  short-haul  principle.  This 
prescribes  that  the  charge  to  any  intermediate  point  shall  not 
exceed  the  aggregate  charge  to  the  final  point.  Although 
there  is  no  vested  interest  in  geographical  situation,  it  be- 
comes an  anomaly  to  charge  to  a  way  station  the  rate  to  a 
competing  point  further  on,  plus  the  additional  rate  from 
the  competing  point  back  to  the  way  station.  This  is  an 
inversion  of  the  principle  of  distance.  The  attempt,  however, 
to  enforce  such  a  hard  and  fast  rule  is  perilous.  As  long  as 
the  law  cannot  be  applied  to  waterways  and  to  foreign  com- 
peting railways  as  well,  the  anomalies  cannot  be  entirely  re- 
moved. Unless  the  railways  from  the  East  to  San  Francisco 
met  the  all-sea  rates,  or  the  Canadian  rates  to  the  coast,  they 
would  lose  their  through  transcontinental  traffic,  and  would 
have  to  raise  their  intermediate  rates  as  well.  While  therefore 
the  Interstate  Commerce  Law  accepts  the  short-haul  principle, 
it  permits  the  commission  to  make  exceptions ;  and  among 
the  nicest  duties  imposed  on  the  commission  is  that  of  deter- 
mining when  an  exception  is,  legitimate. 

But  if  even  this  comparatively  simple  matter  requires  such 
delicate  handling,  what  shall  be  said  of  the  great  mass  of  other 
discriminations,  where  the  charge  to  an  intermediate  station  is 
relatively,  without  being  absolutely,  greater  than  the  charge  to 
a  more  distant  point?  Among  the  perplexing  problems  that 
arise  are  the  following :  Is  it  legitimate  to  make  export  or  im- 


540  Transportation.  [§  213 

port  rates  less  than  domestic  rates,  that  is,  to  charge  less  be- 
tween the  two  points  for  the  same  commodities  when  the  haul 
is  only  a  part  of  the  distance  to  a  foreign  country?  Is  it  rea- 
sonable to  make  group  or  blanket  rates,  that  is,  to  put  all 
stations  within  a  radius  of  a  few  tens  or  even  hundreds  of  miles 
in  a  group  and  make  the  same  charge  to  all  ?  Is  it  just  to  make 
allowance  for  "milling  in  transit"  or  "  floating  cotton,"  that 
is,  to  allow  grain  to  go  from  the  fields  to  the  mill,  or  cotton 
from  the  plantation  to  the  compresses,  or  logs  from  the  forest 
to  the  saw-mill,  and  then  to  proceed  to  the  point  of  destina- 
tion on  its  proportion  of  a  through  rate  rather  than  the  local 
rate?  Is  it  defensible  to  follow  the  "basing  point"  system, 
whereby  local  rates  are  based  according  to  the  relative  dis- 
tance of  the  local  points  from  the  competitive  points,  the  rate 
being  ascertained  in  each  case  by  adding  to  the  through  rate 
to  the  basing  point  the  local  rate  from  that  point  back  to  the 
local  point?  Is  it  permissible  to  make  differentials  between 
cities  —  as,  for  instance,  on  grain,  flour,  and  provisions,  where 
the  domestic  rates  from  the  West  to  New  York  are  two  cents  a 
hundredweight  higher  than  to  Philadelphia,  three  cents 
higher  than  to  Baltimore  and  two  cents  lower  than  to  Boston, 
with  different  figures  for  ex-lake  grain  (grain  from  the  West 
which  leaves  Buffalo  after  storage,  on  a  new  and  independent 
rate)  and  still  different  figures  for  export  rates  ? 

These  are  only  a  few  of  the  embarrassing  questions  which 
call  for  decision.  Three  points  are,  however,  obvious  :  (i)  No 
hard  and  fast  rule  can  be  laid  down.  All  the  circumstances 
and  conditions  must  be  taken  into  consideration,  and  these 
may  change  from  day  to  day  or  season  to  season.  (2)  It  is 
not  only  a  question  of  railway  practice,  but  of  business  and 
local  rivalry.  (3)  The  final  decision  of  such  delicate  and  im- 
portant matters  must  not  be  left  to  the  shippers  or  the  railways, 
but  must  be  intrusted  to  some  higher  authority,  which  should  be 
not  only  expert  in  the  transportation  business,  but  completely 
impartial  as  between  the  railways  and  the  shippers,  on  the  one 
hand,  and  the  rival  sectional  interests  on  the  other. 


§  214]  Railway  Regulation.  541 

214.   Railway  Regulation. 

The  preceding  discussion  has  made  it  clear  that  some  form 
of  railway  regulation  is  necessary.  There  are  five  different 
methods  of  dealing  with  railways,  (i)  The  government  may 
own  and  manage  the  railways,  as  in  Prussia,  Australasia  and 
many  other  British  colonies.  (2)  The  government  may  own 
the  railways,  but  leave  the  operation  in  private  hands,  as  in 
some  of  the  roads  in  North  Carolina  and  all  the  roads  in  some 
minor  European  countries.  (3)  The  railways  may  be  owned 
by  private  companies,  but  operated  by  the  government,  as  until 
recently  in  Italy.  (4)  There  may  be  mixed  ownership  and 
operation,  either  with  the  idea  ,that  the  competition  of  the 
state  railways  will  regulate  the  private  companies,  as  formerly 
in  Belgium,  or  without  any  such  intention,  as  at  present  in 
Russia,  France,  India  and  many  other  countries.  (5)  The 
railways  may  be  left  to  private  ownership  and  management,  as 
in  England  and  the  United  States. 

The  general  discussion  of  government  ownership  or  manage- 
ment, and  the  special  reasons  against  it  in  the  United  States, 
may  be  left  to  a  later  chapter.  Points  one  to  three  may  there- 
fore be  omitted.  On  the  fourth  point  the  experience  of  Belgium 
has  conclusively  proven  that  a  government  railway  is  not  an 
effective  regulator  of  private  companies,  and  that  instead  of 
the  government  railway  drawing  the  private  companies  up  to 
its  level,  the  government  railways,  on  the  contrary,  are  invari- 
ably pulled  down  by  the  stress  of  competition  to  the  level  of 
the  private  companies,  with  personal  discrimination  and  ille- 
gitimate preferences  of  all  kinds.  This  leaves  as  the  practical 
problem  in  Great  Britain  and  the  United  States  point  five, 
or  the  governmental  supervision  of  railways  which  remain  in 
private  hands. 

In  Great  Britain,  where  the  situation  is  much  simpler 
because  of  the  smallness  of  the  country  and  the  extended 
sea-coast,  competition  was  eliminated  at  an  early  date,  and 
personal  discriminations  have  been  correspondingly  rare.  The 


542  Transportation.  [§  214 

chief  questions  have  been  those  of  relative  rates  between  lo- 
calities and  maximum  rates  on  different  classes.  After  several 
more  or  less  feeble  attempts  at  regulation  a  railway  commis- 
sion was  instituted  in  1873,  with  judicial  powers.  Their  find- 
ings as  to  facts  are  final ;  as  to  law,  they  are  reviewable  by  a 
higher  court.  In  1888  a  law  was  enacted  giving  the  Board  of 
Trade  power  to  suggest  maximum  rates,  and  during  the  years 
1891-94  Parliament  accepted  the  recommendation  and  en- 
acted maximum  rates.  Finally,  in  1894  it  was  provided  that 
no  railway  should  increase  its  existing  rates  within  the  max- 
imum without  affirmatively  proving  to  the  satisfaction  of  the 
Railway  Commission  that  the  increase  was  justifiable.  It  has 
been  claimed  that  this  provision  has  seriously  interfered  with 
the  progressive  reduction  of  rates  which  would  naturally  come 
through  the  increase  of  business;  for  the  freedom  to  reduce  a 
rate,  and  the  lack  of  freedom  to  restore  it  if  found  to  be  un- 
profitable, will  prevent  even  the  most  venturesome  railway 
manager  from  making  a  hazardous  experiment. 

In  the  United  States  the  early  attempts  at  regulation  were 
confined  to  the  separate  states.  It  was  not  until  1883,  that 
national  supervision  began  with  the  enactment  of  the  Inter- 
state Commerce  Law.  The  law  was  the  result  of  a  compro- 
mise. It  endeavored  to  maintain  competition,  and  prohibited 
pools,  but  it  did  not  try  to  lay  down  a  rigid  short-haul  rule. 
Not  only  was  pooling  forbidden,  but  under  the  Sherman  Anti- 
Trust  Law  of  1890  it  was  subsequently  held  that  even  railway 
traffic  associations  are  illegal.  The  author  of  the  anti-pooling 
clause  —  Senator  Reagan,  of  Texas,  who  later  served  on  the 
railway  commission  of  his  native  state  —  subsequently  con- 
fessed that  his  original  opinion  had  been  erroneous,  and  the 
Supreme  Court  of  the  United  States,  in  declaring  the  illegality 
of  traffic  associations,  conceded  that  they  were  economically 
beneficial. 

The  Actof  1887  prohibited  unjust  and  unreasonable  charges, 
and  instituted  the  Interstate  ComjTiej^£_Comj"i^ion  to  enforce 
the  law.  Unlike  its  English  predecessor,  the  American  com- 


§  214]    Interstate  Commerce  Commission.  543 


mission  isjioJLa  judicial  court,  and  its 

even  as  to  facts.     Moreover,  it  has  been  settled  by  the  Supreme 

Court  that  its  powers  are  limited  to  declaring  a  particular  rate 

illegaj^jaut  that  it,Jiaj5jioj3pjs^^4^^ 

be  in  the  future.     The  question  which  is  still  irT^de  Bate  is  as 

txr~whether  rate-making  powers  should  be  conferred  on  the  N 

commission. 

As  to  this  it  must  be  remembered  that  the  principal  com-  ' 
plaints  are  personal  discrimination  and  relatively  unreasonable 
rates.  So  far  as  <trTe-era7tisaJ;ion  of  personal  discrimination  is 
concerned,  the  efficacy  of  rate-fixing  powers  is  more  than 
doubtful.  Personal  discriminations  are^aiw^ys^sec^ei,  and  can 
be  secured  in  a  multiplicity  ~uf  "^ays  through  rebates,  under- 
billing,  private  car  charges  and  illicit  agreements  of  other 
kinds.  The  Elkins  Law  of  1903  has  imposed  as  severe  pen- 
alties on  such  discriminations  as  it  is  well  possible  to  devise. 
The  surest__way  of  abolishing^  personal  jjis^rjjiiinajjons  is  by 
removing  the  competition  which  is  their  cause.  To  seek  to 
frtfstrate~railway  agreements,  and  at'the  same  time  to  prevent 
rebates,  is  to  blow  hot  and  cold  at  once.  With  the  continued 
enforcement  of  the  anti-pooling  and  anti-trust  laws  personal 
discriminations  will  be  inevitable;  and  it  is  only  to  the 
extent  that  the  laws  are  not  actually  enforced  to-day  that  per- 
sonal discriminations  are  less  than  they  formerly  were. 
ra£e-  fixing  powers  willjiva.il  one__jot. 

As  to  Telatjve]^  unreasonable  _ra£es  the  great  argument 
against  granting  the  commit™-*  rafp-fjyjng  pgwprs  is  that  it 
may  hampex.  railway  do-ueJaiLment  and  create  the  danger  of 
sectional  strife.  In  a  country  which  is  still  in  the  early  stages 
TjfttTeconomic  development,  and  where  conditions  are  chang- 
ing from  day  to  day,  to  give  to  a  small  body  of  men,  however 
expert,  the  right  to  declare  rates  for  the  entire  country  would 
be  to  impute  to  them  a  wisdom  and  capacity  which  they  can- 
not possibly  possess.  The  mistakes  which  they  are  sure  to 
make  will  to  that  extent  retard  railway  facilities  and  jeopardize 
commercial  progress.  Furthermore,  under  prevailing  Amer- 


544 


Transportation. 


[§  214 


lean  conditions,  it  will  be  jiffJ£iilt_tg_  keep  the  commission 
invested  with  sucjiJaT^i£acJiiflg-43p^^ 
ences.  As  soon  as  political  influences  make  themselves  felt, 
the  commission  will  be  forced,  in  self-defence,  to  do  what 
Germany  has  done  of  recent  years,  —  that  is,  to  approach  as 
near  as  possible  to  a  distance  tariff,  and  thus  to  abandon  the 
advantages  of  the  value  of  service  principle,  which  has  con- 
tributed so  materially  to  the  low  rates  and  the  economic  pros- 
perity of  the  United  States. 

Thus  there  are  great  perils  on  both  sides.     To  leave  the 


powers 


rs  oMhej^rjimisai  on  as  thpy-new  are  i^j 
""tTie~omi 


to  confer  uponthe  commission  great  powers  would  be  to  im- 
part to  our  system  of  railway  rates  a  rigidity  which  would  make 
us  lose  on  the  one  hand  what  was  gained  on  the  other.  The 
escape  from  the  difficulty  would  seem  to  be  a  compromise 
between  the  private  and  the  public  idea.  L£ave_to_the  rail- 
ways the  weight  of  fixing  rates  in  first  instance  ;  give  to  an 
hnf^jTtrTe"  power,  nt  instituting  JQfluiries  and  re- 

piit^-d.r    1  ......  1  .    nf    ,    jurlirhl   hody  thfi  duty  of 


passing  in  last  instance  upon  the  reasonablenessj)f  the  charge 
*OnTylrt  some  such  way  as^this  can~"there  be  a  reconciliation  of 
the  railwiiyfi  nnrl  tbp  p"H^  whi^h  will  tenH  tn 


without  impairing  efficiency. 


CHAPTER   XXXII. 
INSURANCE. 

215.  References. 

A.  H.  Willett,  The  Economic  Theory  of  Risk  and  Insurance  (Columbia 
Studies,  XIV,  No.  2,  1901),  and  The  Cost  of  Life  Insurance  (Polit. 
Sci.  Quart.,  XX,  1905) ;  C.  Walford,  Insurance  Cyclopedia  (5  vols., 
1871-1880)  ;  and  Insurance  Giiide  and  Handbook  (3d  ed.,  1900) ;  W.  A. 
Fricke,  Iterance,  A  Text  Book  (1898);  T.  E.  Young,  Insurance,  A 
Practical  Exposition  (1904);  A.  J.  Wilson,  The  Business  of  Insurance 
(1904);  A.  C.  Campbell,  Insurance  and  Crime  (1902);  A.  Manes, 
Versicherungswesen  (1905)  ;  Journal  of  the  Institute  of  Actuaries  (1850-) ; 
Transactions  of  the  Actuarial  Society  of  America  (1889-). 

SPECIAL  CLASSES  OF  INSURANCE:  F.  Martin,  History  of  Lloyds  and 
of  Marine  Insurance  in  Great  Britain  (1876);  W.  Gow,  Marine  Insur- 
ance (1895) ;  W.  Alexander,  The  Life  Insurance  Company  (1905) ;  Mutual 
Life  Insurance  Company  Educational  Leaflets  (1903)  ;  F.  C.  Moore,  Fire 
Insurance  and  How  to  Btiild  ( 1903)  ;  F.  H.  Kitchin,  Principles  and  Prac- 
tice of  Fire  Insurance  (1904)  ;  P.  Mayet,  Agricultural  Insurance  (1893)  ; 
E.  MacNeill,  A  Study  of  Accidents  and  Accident  Insurance  ( 1900). 

216.  Nature  of  Insurance. 

The  economic  life  of  man  is  subject  to  uncertainty.  Even 
the  old  adage  that  there  is  nothing  sure  in  life  save  death  and 
taxes  is  incomplete,  because  even  though  the  uncertainty 
does  not  attach  to  the  fact  itself,  it  does  attach  to  the  time 
of  the  occurrence  or  to  the  magnitude  of  the  phenomenon. 
Insurance  is  a  devioe  to  remove  the  economic  consequences 
of  uncertainty. 

From  one  point  of  view  it  might  be  claimed  that  there  is 
no  such  thing  as  chance.  Everything  that  happens  in  the  uni- 
verse is  obedient  to  law  ;  that  is,  it  is  the  result  of  a  cause.  If 
we  had  full  knowledge  of  all  causes,  we  could  predict  every 
event  with  accuracy,  and  thus  eliminate  such  a  thing  as  a 
35  545 


546 


Insurance.  [§216 


chance  occurrence.  For  if  we  previously  knew  that  it  was  to 
happen  at  that  moment,  it  would  not  be  a  chance.  On  the 
other  hand,  the  word  chance  may  be  used  in  a  slightly  different 
sense.  If  a  pack  of  cards  has  been  well  shuffled,  it  is  an  even 
chance  that  we  turn  up  at  the  first  deal  a  black  or  a  red  card. 
Chance  here  means  the  degree  of  probability  of  an  occurrence. 
The  more  numerous  the  occurrences,  the  more  regularity  will 
there  be  in  their  happening ;  so  that  when  we  have  very  large 
numbers,  there  is  even  such  a  thing  as  a  law  of  chance. 

The  degree  of  uncertainty,  however,  is  not  the  same  thing 
as  the  degree  of  probability.  When  the  probability  is  zero  or 
small,  the  uncertainty  indeed  is  zero  or  small,  and  there  is  no 
chance  or  little  chance.  The  uncertainty,  however,  increases 
only  up  to  a  certain  point.  The  uncertainty  is  greatest  when 
the  chances  are  even,  and  then  diminishes  as  the  chances  in- 
crease, until  the  uncertainty  disappears,  when  the  probabil- 
ity of  occurrence  becomes  infinite.  Certainty  means  either 
no  probability  or  no  improbability;  after  the  point  of  even 
chance  has  been  passed,  probability  increases  as  the  uncer- 
tainty decreases. 

The  term  risk  may  be  applied  to  either  probability  or  un- 
certainty. If  there  is  only  one  chance  in  a  hundred  of  a  man's 
success  in  an  enterprise,  we  say  that  he  is  taking  an  immense 
risk.  In  that  case  the  probability  of  failure  is  immense,  but 
the  uncertainty  very  small.  In  ordinary  economic  life,  how- 
ever, men  will  rarely  enter  upon  any  business  enterprise  unless 
they  think  that  they  have  at  least  an  even  chance  of  success, 
and  usually  not  unless  they  think  that  they  have  more  than 
this  even  chance.  In  other  words,  they  will  not  act  unless 
they  feel  that  although  both  the  probability  of  loss  and  the  un- 
certainty increase  together,  both  may  be  guarded  against. 
Putting  it  in  another  way,  the  risk  with  which  economic 
activity  commonly  concerns  itself  is  the  degree  of  uncertainty 
rather  than  the  degree  of  probability.  The  need  of  protection 
against  risk  grows,  therefore,  with  the  degree  of  uncertainty 
which  in  economic  actions  increases  as  probability  increases. 


§  216]  Nature  of  Insurance.  547 

Uncertainty  is  clearly  a  disadvantage,  which  every  prudent 
man  desires  as  far  as  possible  to  eliminate.  This  can  be  ac- 
complished in  three  ways  :  by  avoidance,  by  prevention,  or  by 
assumption  of  risk. 

(1)  In  certain  cases  involving  the  investment  of  capital,  he 
can  avoid  the  risk  by  joining  to  the  economic  transaction  in 
question  another  which  counterbalances  it.     This,  as  we  have 
learned  (§  155),  is  one  of  the  functions  of  speculation,  as  in 
the  ordinary  "  covering  transactions  "  of  the  cotton,  or  wheat, 
or  foreign  exchange  "  futures."     The  scope  of  such  speculative 
transactions,  however,  is  comparatively  restricted. 

(2)  He  can  prevent  or  greatly  reduce  the  degree  of  risk. 
If  he  wants  to  be  assured  that  his  house  will  not  burn  down, 
he  may  make  it  absolutely  fire -proof.    That,  however,  involves 
an  immense  expense  which  he  perhaps  cannot  afford.     If  this 
were  the  only  alternative,  he  would  make  the  house  fairly  sub- 
stantial, putting  capital  into  it  up  to  the  point  where    the  ad- 
ditional cost  would  in  his  opinion  outweigh  the  chance  of  loss 
by  fire.     An  ounce  of  prevention  is  worth  a  pound  of  cure ; 
but  two  pounds  of  prevention  are  not  worth  a  pound  of  cure. 
In  modern  society  as  a  whole,  far  greater  sums  are  spent  in 
preventing  losses  of  all  kinds  than  formerly ;   in  fact,  govern- 
ment expenditures  are  to-day  to  an  overwhelming  extent  of  a 
preventive  rather  than  of  a  remedial  character.     But  that  is 
because  we  realize  that  the  cost  of  a  board  of  health  is  insig- 
nificant when  compared  to  that  of  a  plague,  or  the  cost  of 
education  slight  in  comparison  to  the  economic  and  political 
losses  due  to  popular  ignorance.     Municipal  ordinances  may 
compel   individuals    to    erect    substantial    structures,   but    the 
prevention  of  risk  can  profitably  go  only  to  a  certain  point. 
Moreover,  no  matter  how  elaborate  the  precautions,  there  are 
certain  catastrophes  against  which  no   human  ingenuity  can 
avail.     Earthquake,  lightning,  flood  and  tempest  will  destroy 
property  just  as  accident,  non-employment  or  illness  will  de- 
stroy personal  income.     Something   more  than  prevention  is 
requisite. 


548  .Insurance.  [§  217 

(3)  He  can  face  and  assume  the  risk,  but  reduce  it  by 
combining  his  own  risk  with  that  of  others  into  a  group  and 
distributing  the  losses  to  the  group  as  a  whole.  In  this  way  he 
makes  what  was  uncertain  sure.  This  method,  hence,  is  called 
assurance  or,  more  commonly  in  modern  times,  insurance. 


217.    Growth  of  Insurance. 

Insurance  is  in  its  important  manifestations  a  modern  phe- 
nomenon, and  a  result  of  industrial  capitalism.  It  is  due  to 
the  fact  not  so  much  that  men  are  now  more  anxious  to  avoid 
risk  than  formerly,  but  that  risks  have  increased  to  a  prodigious 
extent.  It  seems  at  first  blush  absurd  to  say  that  modern  civi- 
lization, which  implies  prudence  and  forethought,  should  at  the 
same  time  mean  increased  risk.  The  contrary  assertion,  how- 
ever, which  assumes  that  economic  progress  implies  the  dimi- 
nution of  risk,  is  clearly  an  error.  Progress  and  increased  risk 
are  not  incompatible.  Uncertainty  is  assuredly  to  be  depre- 
cated ;  but  if  the  saving  of  cost  due  to  a  new  invention  or  a 
new  economic  process  exceeds  the  risk  of  loss  due  to  the  greater 
uncertainty,  society  is  justified  in  adopting  it.  An  express  train, 
for  instance,  involves  more  risks  than  a  slow  freight,  but  is  none 
the  less  an  indication  of  progress.  It  is  only  when  an  eighteen- 
hour  train  is  put  on  between  New  York  and  Chicago  that  it 
becomes  a  question  whether  the  risk  does  not  outweigh  the 
advantage.  Up  to  that  point,  at  all  events,  it  is  either  directly 
or  indirectly  an-  economic  gain.  The  increase  of  risk  in  mod- 
ern times  is  therefore  ascribable  to  the  very  spirit  of  invention 
and  better  utilization  of  the  forces  of  nature.  Risk  and  progress 
increase  together.  The  pace  of  modern  life  is  rapid  ;  competi- 
tion and  the  factory  system  have  engendered  uncertainties, 
whereas  the  leisurely  mediaeval  methods  of  customary  price  and 
handicraft  industry  meant  a  slow  and  certain  humdrum.  In- 
dustrial capitalism  has  virtually  created  risk  as  well  as  the  way 
of  meeting  risk  through  insurance. 

The   beginnings    of  insurance   are  to   be   sought   in  three 


§  217]  Growth  of  Insurance.  549 

entirely  distinct   germs :    primitive    mutual    help,  the    classic 
bottomry  loans  and  the  mediaeval  rent  charges. 

(1)  Well-nigh  all  primitive  societies  practise  some  methods 
of  collective   responsibility.     Thus    in    the    earliest   Teutonic 
Frithgilds  we  find   mutual  responsibility  for  loss  by  murder, 
fire,  theft,  or  loss  of  cattle.     Again,  in  the   mediaeval  guilds 
the  principle  of  joint  guarantee  was  almost  universal.     The 
same  principle   in  one   sense   underlies    the    modern    mutual 
insurance  company.     But  it  would  be  hazardous  to  attempt  to 
trace  any  direct  connection  between  these  early  groups  and 
the  modern  business  enterprises. 

(2)  The  first1  permanent  and  well-authenticated  form  of 
business  insurance  is  that  of  the  only  kind  of  enterprise  in 
which  capital  was  employed  on  a  large  scale,  namely,  in  over- 
sea trading.     Ancient    and  mediaeval  insurance   started  with 
commercial  capital.    The  marine  insurance  of  the  middle  ages 
was  an  outgrowth   of  the   ancient   system  of  bottomry  loan, 
known  in  classic  Rome  as  fcenus  nauticum  or  pecunia  trajec- 
titia.     If  the  owner  of  a  vessel  needed  funds,  he  could  secure 
a  loan  on  condition  that  it  be  repaid  with  interest,  provided 
the  ship  were  not  lost  or  did  not  fall  into  the  hands  of  enemies 
or  pirates.     The  bottomry  contract  was  therefore  in  a  certain 
sense  an  embryonic  insurance,  but  with  the  peculiarities  that  the 
insurance  money  was  paid  in  advance  and  that  it  included  a 
loan  as  well.     In  point  of  fact  the  loan,  rather  than  the  insur- 
ance, was  the  principal  thing.     When  a  new  form  of  contract 
was  devised  in  the  Italian  towns  of  the  thirteenth  and  four- 
teenth centuries,  whereby  the  payment  was  made  after,  and  not 
before,  the  loss  of  the  ship,  the  loan  element  disappeared  and 
the  contract  became  one  of  insurance.     The  person  who  as- 
sumed the  risk  was  called  the  underwriter  of  the   risk.      In 


1  The  only  instance  of  insurance,  pure  and  simple,  in  classic  antiquity 
that  has  come  down  to  us  is  that  mentioned  by  Boeckh,  Public  Economy 
of  Athens,  where  Antigenes  of  Rhodes  undertook  for  a  payment  of  eight 
drachmas  per  slave  to  make  good  his  price,  as  estimated  by  the  owner  at 
the  time  of  his  escape. 


55°  Insurance.  [§  217 

England  these  marine  underwriters  or  insurers  met  in  the 
coffee-houses,  one  of  which  at  the-  end  of  the  seventeenth 
century  happened  to  be  owned  by  Edward  Lloyd.  This  grad- 
ually drew  to  it  more  and  more  of  the  underwriters,  until  by 
the  middle  of  the  next  century  virtually  all  the  marine  insur- 
ance was  done  at  "Lloyd's." 

(3)  The  final  source  of  modern  insurance  can  be  traced 
more  particularly  in  connection  with  the  growth  of  life  insur- 
ance. It  is  true  that  marine  insurance  itself  after  a  time  de- 
veloped in  part  into  a  kind  of  life  insurance,  for  it  gradually 
became  the  custom  for  the  underwriter  to  insure  not  only  the 
ship  and  its  contents  in  the  shape  of  commodities,  but  also  the 
cattle  and  the  lives  of  the  passengers  themselves.  Far  more 
important,  however,  as  a  source  of  life  insurance  was  the 
mediaeval  system  of  rent  charges.  These  were  utilized  to 
evade  the  rigor  of  the  usury  laws.  Loans  were  made  to  in- 
dividuals on  the  transfer  of  lands  for  a  definite  time,  during 
which  the  lender  enjoyed  the  fruits.  These  fruits  were  in  lieu 
of  the  interest  which  was  prohibited  by  statute.  Gradually, 
however,  instead  of  transferring  the  use  of  the  lands  them- 
selves, there  was  substituted  in  its  stead  the  obligation  to  pay 
a  rent  or  annuity,  called  a  rent  charge,  because  the  annual  pay- 
ment was  charged  on  the  rent  or  produce  of  the  land.  These 
annuities  were  either  for  life  or  for  a  term  of  years.  Life  an- 
nuities were  granted,  after  a  time,  even  by  the  church  through 
the  s  ode  fas  sacri  officii. 

From  decade  to  decade,  however,  the  speculative  element 
developed.  The  transaction  became  popular.  It  was  techni- 
cally not  a  loan,  but  a  transfer  of  land.  It  yielded  large 
returns,  —  eight  to  twelve  per  cent  on  the  capital  invested. 
More  important  than  all,  it  was  generally  accompanied  by  the 
condition  that  the  principal  should  be  repaid  only  if  the 
annuity-payer  (the  borrower)  should  die  before  the  annuitant. 
In  the  course  of  time  the  payment  of  a  capital  sum  was  dis- 
pensed with,  but  an  annuity  (premium)  was  paid  every  year  and 
the  capital  was  handed  over  only  in  case  of  the  death  of 


§217]  Varieties  of  Insurance.  551 

the  premium  payer.  Thus  the  system  became  practically 
indistinguishable  from  life  insurance.  Other  mediaeval  methods 
akin  to  modern  insurance  were  the  ransom  and  the  marriage 
portion  annuities.  In  the  first  case  payments  were  made  to 
individuals  to  provide  against  possible  capture  by  brigands. 
In  the  second  case  the  church  took  loans  in  the  shape  of 
annuities  from  individuals  without  paying  interest,  but  with  the 
obligation  to  pay  the  capital  when  the  daughter  married.  In 
the  middle  of  the  seventeenth  century  an  Italian  by  the  name 
of  Tonti  introduced  the  principle  of  survivorship  in  a  group  and 
thus  gave  rise  to  the  modern  Tontine  annuity. 

Out  of  these  small  origins  the  modern  system  of  insurance 
has  developed.  The  most  important  forms  of  modern  insur- 
ance are  marine,  life  and  fire  insurance.  Marine  insurance 
has  not  changed  much  in  character  for  several  centuries.  But 
life  insurance  could  not  develop  on  a  large  scale  until  the  scien- 
tific principles  underlying  it  were  thoroughly  understood. 

In  every  insurance  the  (gross)  premium  payable  by  the 
beneficiary  who  takes  out  the  insurance  is  composed  of  two 
parts,  —  so-called  loading  and  the  net  premium,  or  the  sum 
which  is  mathematically  necessary  for  the  creation  of  a  fund 
sufficient  to  enable  the  company  to  pay  the  policy  in  full  when 
it  falls  due.  The  loading  is  the  amount  added  to  the  net 
premium  to  provide  for  expenses  and  for  contingencies,  like 
loss  of  invested  funds  or  failure  to  earn  the  anticipated  inter- 
est. The  important  constituent  naturally  is  the  net  premium. 
In  life  insurance  this  is  the  joint  product  of  the  theory  of 
probabilities,  the  experience  of  vital  statistics  and  a  calcula- 
tion of  interest  rates.  The  so-called  mortality  table  shows 
how  many  in  a  given  large  number  of  persons  will  live  to 
each  age,  and  consequently  how  many  will  die  at  each  age. 
It  is  impossible  to  predict  in  what  year  a  particular  individual 
will  die,  but  it  is  possible  to  state  with  approximate  accuracy 
how  many  out  of  a  given  number  will  die  at  any  specified 
age.  On  the  basis  of  such  a  mortality  table  it  is  a  simple  arith- 
metical computation  to  ascertain  the  premium  necessary  to  be 


552  Insurance.  [§217 

charged  at  any  given  age  in  order  to  create  a  fund  which  will 
accumulate  to  a  fixed  point  at  a  given  rate  of  interest.  The 
first  attempt  to- apply  mathematical  principles  to  life  annuities 
was  made  in  1671  by  Jean  DeVVitt,  grand  pensionary  of  Hol- 
land and  West  Friesland.  The  first  approximately  correct 
mortality  table  was  constructed  by  Dr.  Edmund  Halley  in  1693. 
As  these  tables  became  more  precise,  life  insurance  developed 
as  a  business.  The  first  enterprise  started  on  a  really  scientific 
basis  was  the  Equitable  Society  in  London  in  1 762.  In  America 
the  first  society  was  the  New  York  Life  Insurance  and  Trust 
Company,  inaugurated  in  1830. 

The  centre  of  marine  insurance  is  still  in  England.  But  with 
the  uncertainties,  the  vicissitudes  and  the  magnitude  of  modern 
business  life  in  the  United  States,  the  American  life  insurance 
companies  have  far  transcended  all  others  in  importance.  Of 
the  amount  of  life  insurance  in  force  in  the  world  in  1905  four 
American  companies  —  the  Equitable  Life,  the  Mutual  Life, 
the  New  York  Life  and  the  Northwestern  Mutual  Life  com- 
panies —  have  between  a  third  and  a  quarter  of  the  entire 
amount.  The  figures  are  as  follows  : 

The  four  American  companies     .     .     .       $5,680,316,147 
All  other  life  insurance  companies  in 

the  world $13,862,232,600 

Total $19,542,548,747 

Wherever  uncertainty  can  be  removed  we  find  insurance. 
In  addition  to  life,  fire  and  marine  insurance,  there  have 
developed  in  recent  years  cattle  insurance,  hail  insurance,  glass 
insurance,  windstorm  and  tornado  insurance  (first  in  America 
in  1861),  aqueduct  insurance  (against  the  risk  of  damage  from 
a  break  in  the  aqueduct  or  water  mains),  boiler  insurance, 
burglary  insurance,  elevator  insurance,  automobile  insurance, 
credit  insurance  (through  the  credit  indemnity  companies), 
guaranty  insurance  (against  the  risk  of  breach  of  trust  by  offi- 
cials), accident  insurance,  illness  insurance,  out  of  work  insur- 
ance, old  age  insurance,  insurance  against  damages  to  others 


§  2 1 8]  Theory  of  Insurance.  553 

by  defects  in  the  insurer's  premises,  and  loss  of  rent  insurance. 
We  even  find  such  remarkable  examples  as  machine  insurance 
(against  the  risk  of  damage  through  the  carelessness  of  work- 
men), strike  insurance,  crop  failure  insurance,  gate  receipts 
insurance  (in  sporting  matches)  and  insurance  of  the  voice  of 
a  prima  donna.  In  Russia  there  is  a  company  which  insures 
individuals  against  the  economic  consequences  of  political  per- 
secution, and  in  England  and  America  there  has  even  been 
talk  of  insurance  against  divorce  and  insurance  against  twins. 

218.  Theory  of  Insurance. 

The  essence  of  insurance  is  the  effort  to  diminish  the  risks 
of  uncertainty.  Insurance  is  productive,  that  is,  it  involves  an 
increase  of  wealth,  because  it  lessens  the  social  costs  of  risk. 

We  must  be  careful  not  to  confuse  the  loss  due  to  the  uncer- 
tainty with  the  loss  due  to  the  occurrence  itself.  The  occur- 
rence is  bound  to  happen.  Death  will  come,  fire  will  consume, 
the  tornado  will  strike.  In  some  cases  the  probability  of  the 
occurrence  or  the  amount  of  the  loss  may  indeed  be  some- 
what lessened  by  preventive  action.  A  good  police  force  will 
diminish  burglary,  an  efficient  fire  department  and  a  good 
building  code  will  decrease  fire  losses,  carefully  devised  factory 
laws  will  lessen  accidents.  In  all  these  cases,  however,  we  have 
to  deal  with  prevention,  not  with  insurance.  Insurance  takes 
the  fact  itself  for  granted ;  it  does  nothing  to  eliminate  the 
occurrence.  The  loss  is  hence  the  same,  whether  we  have 
insurance  or  not ;  the  house  is  burned  and  there  is  less  wealth 
than  before. 

There  is,  however,  in  every  case  an  additional  loss,  due  not 
to  the  occurrence  but  to  the  uncertainty.  This  can  be  most 
clearly  seen  in  the  investment  of  capital.  The  ordinary  man 
will  not  assume  risks  unless  he  is  remunerated  for  it.  In  the 
case  of  the  entrepreneur,  indeed,  the  assumption  of  risk  is  one 
of  the  elements  in  enterprise,  because  he  expects  in  the  end  to 
derive  profits  sufficiently  large  to  compensate  for  possible 
immediate  losses.  But  when  a  capitalist  loans  funds,  and  there 


554  Insurance.  [§  218 

is  any  special  degree  of  risk  connected  with  the  transaction,  it 
is  a  familiar  fact  that  he  will  increase  the  rate  of  interest  by  a 
corresponding  amount.  This  increase  in  the  interest  rate  is  an 
addition  to  the  expenses  of  the  borrower.  If  the  risk  is  not 
peculiar  to  the  individual  borrower,  but  is  connected  with  the 
entire  class  of  transactions  in  question,  and  if  the  borrower 
utilizes  the  loan  in  productive  enterprises,  the  increase  in  the 
interest  rate  becomes  an  addition  to  the  cost  of  the  product 
and  thus  to  the  price  ultimately  charged  to  the  consumer.  In 
other  words,  if  the  uncertainty  could  be  eliminated,  the  price 
of  the  commodity  would  be  lower  and  there  would  be  a  corre- 
sponding gain  to  the  community  as  a  whole.  What  is  true  of  the 
investment  of  capital  is  true  of  the  employment  of  any  produc- 
tive factor.  Wherever  there  is  an  economic  action  —  whether 
it  be  the  application  of  labor,  the  employment  of  capital,  or  the 
utilization  of  any  form  of  wealth  —  uncertainty  results  in  a 
lower  degree  of  productivity  or  in  a  smaller  surplus  of  utility 
than  would  be  the  case  if  the  uncertainty  were  obviated  or 
decreased.  Insurance  minimizes  this  uncertainty  and  is 
accordingly  productive  of  wealth. 

Like  transportation,  insurance  falls  under  the  head  of  ex- 
change of  wealth,  while  exchange,  as  we  know,  is  itself  a  spe- 
cies of  production.  Improved  transportation  reduces  the  cost 
of  having  a  commodity  in  one  place  become  a  more  valuable 
commodity  in  another  place  ;  improved  insurance  reduces  the 
cost  of  having  the  uncertainty  of  the  future  change  into  the  more 
valuable  certainty  of  the  present.  Transportation  overcomes 
the  disadvantages  of  space  ;  insurance  overcomes  the  disad- 
vantages of  time.  Transportation  is  productive  because  it 
increases  space  utilities;  insurance  is  productive  because  it 
increases  time  utilities. 

It  will  be  asked,  however,  how  does  insurance  minimize  un- 
certainty? The  answer  is,  through  the  combination  of  risks. 
This  is  a  result  of  the  law  of  probabilities.  If  we  have  accu- 
rate statistics  of  fires,  for  example,  for  a  term  of  years  and 
take  the  number  of  fires  with  a  given  number  of  houses  during 


§  2 1 8]  Combination  of  Risks.  555 

that  period,  we  get  an  average.  If  the  figures  in  any  year 
corresponded  exactly  to  the  average,  there  would  be  a  cer- 
tainty in  the  number  of  fires,  and  the  only  uncertainty  would 
be  as  to  which  house  would  burn.  In  point  of  fact,  however, 
in  any  particular  year  there  will  be  a  variation  from  the  aver- 
age. According  to  a  well-established  law,  the  probable  varia- 
tion increases  only  as  the  square  root  of  the  number  of  cases. 
If  there  are  a  hundred  times  as  many  houses,  there  will  be  only 
ten  times  as  much  probable  variation  from  the  average  loss. 
Hence  the  larger  the  number  of  cases,  the  less  will  be  the  uncer- 
tainty as  to  the  amount  of  loss  which  will  be  borne  by  the  group 
as  a  whole.  Insurance  combines  the  risks  into  a  group,  and 
thus  reduces  the  element  of  uncertainty.  The  risk  of  the  group 
is  less  than  the  sum  of  the  risks  of  the  individuals  who  form 
the  group. 

An  individual  can  manifestly  not  afford  to  insure  himself, 
because  the  insurance  fund  which  he  would  be  obliged  to  accu- 
mulate would  be  out  of  all  proportion  to  his  possible  earnings. 
An  immense  corporation,  like  a  steamship  company  with  hun- 
dreds of  vessels,  may  practise  self-insurance  with  a  better  chance 
of  success  ;  but  the  advantages  of  having  the  insurance  business 
entrusted  to  a  separate  class  is  so  pronounced  that  self-insur- 
ance is  extremely  rare.  The  great  benefit  of  an  insurance 
company  is  not  only  that  the  risks  are  combined,  but  also  that 
they  are  transferred  to  a  class  who  can  afford  to  make  a  special 
study  of  the  problem,  and  who  can  thus  reduce  the  cost  of  in- 
surance by  displaying  their  ability  to  estimate  uncertainties. 
Whether  the  company  is  a  stock  corporation  or  a  mutual 
company  is  of  importance  only  as  to  the  ultimate  distribution 
of  the  profits  of  the  enterprise  :  in  the  one  case,  as  in  the 
other,  however,  the  management  of  the  business  is  confided 
to  a  class  of  experts.  The  more  adept  the  insurance  com- 
panies, and  the  more  scientific  their  methods,  the  closer  will 
be  the  correspondence  between  the  preparation  for,  and  the 
fact  of,  loss  and  the  smaller  will  be  the  accumulation  of  the 
necessary  insurance  fund,  the  lower  will  be  the  insurance  pre- 


556 


Insurance.  [§219 


mium,  and  the  greater  will  be  the  net  gain  to  the  community. 
Insurance  properly  conducted  is  the  opposite  of  gambling.  It 
any  one  takes  out  an  insurance  policy,  he  frees  himself  from 
an  existing  uncertainty  and  transfers  the  risk  to  some  one  who 
is  more  qualified  and  ready  to  assume  it ;  if  he  makes  a  wager 
with  another,  the  newly  created  uncertainty  attaches  to  both. 
Insurance  is  the  transfer  and  reduction  of  risk ;  gambling  is  the 
creation  and  increase  of  risk. 

219.   Methods  and  Regulation  of  Insurance. 

The  primary  function  of  the  insurance  company  is  to  reduce 
uncertainty.  Insurance  companies  as  business  enterprises, 
however,  seek  to  enlarge  their  profits  in  other  ways. 

(1)  Sometimes  insurance  companies  endeavor  to  combine 
the  business  of  insurance  and  of  prevention.     Strictly  speak- 
ing, the  insurance  premium  is  the  payment  made  to  the  com- 
pany to   induce   it  to  assume   the   risk.     But  fire   insurance 
companies,  for  instance,  conduct  the  fire  patrol  system,  and 
organize  for  protecting  coverings  in  case  of  fire ;  and  the  cost 
of  this  is  added  to  the  insurance  proper  and  is  included  in  the 
so-called  premium.     In  reality,  however,  as  we  have  seen,  this 
is  prevention,  not  insurance  :  it  tends  to  reduce  the  loss  through 
the  occurrence,  not  the  uncertainty  of  the  occurrence.     In  the 
same  way  certain  fire  insurance  companies  make  a  lower  rate 
when  the  insurer  engages  to  use  certain  precautions,  like  bet- 
ter buildings,  automatic  fire-sprinklers,  etc.     This  again  is  not 
insurance,  but  prevention. 

(2)  Life  insurance  companies  do  an  immense  business  not 
alone  as  insurance  companies  but  as  media  of  secure  invest- 
ment.    As  a  consequence  there  is  a  great  variety  in  the  kinds 
of  policies  issued.     The  ordinary  form  is  the  annual  dividend 
policy.     Here,  by  the  time  the  second  annual  premium  is  pay- 
able by  the  policy  holder,  a  dividend  is  declared  on  the  policy. 
This  may  take  the  form  of  a  "  reversionary  addition  "  which  is 
added  to  the  amount  of  the  insurance,  the  premium  remaining 
the  same  ;  or  it  may  be  a  "  cash  dividend,"  necessarily  smaller, 


§219]  Methods  of  Insurance.  557 

which  can  be  used  to  reduce  the  premium,  the  amount  of  the  in- 
surance remaining  the  same.  With  every  year  this  dividend 
grows,  and  after  the  lapse  of  several  years  the  policy  acquires  a 
"  cash  surrender  value,"  that  is,  a  sum  which  the  company  will 
pay  to  the  holder  on  the  surrender  of  the  policy.  In  lieu  of 
the  annual  dividend  policy,  the  holder  may  prefer  a  deferred 
dividend  policy,  according  to  which  a  cash  sum  or  its  equivalent 
will  be  paid  at  the  end  of  a  term  of  years.  Thirdly,  he  may 
choose  a  policy  without  any  dividends  at  all,  the  so-called 
non-participating  policy,  under  which  he  obtains  his  insurance 
at  a  lower  rate  in  consideration  of  the  fact  that  he  waives  all 
claims  to  dividends.  Again,  the  policy  may  be  either  a  life 
policy  payable  upon  his  death  or  an  endowment  policy,  whereby 
the  insurance  is  payable  to  the  beneficiary  at  the  expiration  of 
a  certain  period.  These  endowment  policies  may,  like  the 
others,  be  issued  either  on  the  annual  dividend  or  the  deferred 
dividend  plan.  Finally,  the  policy  may  be  a  term  policy  or 
a  limited  payment  life  policy,  where  the  premiums  do  not  con- 
tinue for  life,  but  are  limited  to  a  definite  number  of  years, 
after  which  the  policy  becomes  "  paid  up  "  and  remains  in 
statu  quo  until  the  death  of  the  insured.  Moreover,  there 
may  be  all  manner  of  combinations  of  these  various  kinds  of 
policies,  such  as  continuous  instalment  endowment,  yearly 
renewable  term,  return  premium,  and  double  endowment 
policies. 

It  is  especially  in  such  cases  as  this,  where  the  accumulated 
surplus  becomes  so  enormous,  that  the  wider  problem  of  public 
policy  assumes  considerable  importance.  In  the  case  of  banks, 
as  we  know,  legislation  is  needed  to  protect  the  reserve.  In 
the  case  of  insurance  which  is  primarily  a  method  of  making 
accumulations  to  protect  the  great  mass  of  beneficiaries,  the 
need  of  regulation  is  even  more  obvious.  Almost  all  of  the 
American  states  have  a  legislative  code  and  an  administrative 
department  designed  to  control  the  various  classes  of  insurance 
companies. 

The  recent  scandals  connected  with  the  financial  manage- 


558  Insurance.  [§219 

ment  of  the  Equitable  Life,  the  greatest  insurance  company  in 
the  world,  have  emphasized  the  necessity  of  a  more  carefully 
devised  legislation  and  a  more  effective  supervision  calculated 
to  enforce  responsibility  and  to  guarantee  solvency.  In  some 
countries,  as  in  Australia,  the  public  is  so  solicitous  of  the  in- 
terests of  the  policy  holders  that  the  government  has  even 
assumed  the  management  of  the  insurance  business,  at  least  in 
part.  Radical  as  such  a  step  may  seem,  it  is  at  all  events  in- 
disputable that  there  is  both  room  and  need  for  careful  public 
scrutiny  and  effective  social  supervision  of  a  business  that 
has  intertwined  itself  with  the  very  roots  of  modern  eco- 
nomic life. 


Part  IV. 

Conclusion. 

CHAPTER   XXXIII. 
GOVERNMENT   AND   BUSINESS. 

220.  References. 

H.  C.  Adams,  The  Relation  of  the  State  to  Industrial  Action  (Am. 
Econ.  Assoc.,  Publications,  I,  1886);  and  Economics  and  Jurisprudence 
(Am.  Econ.  Assoc.,  Economic  Studies,-  II,  1897) ;  E.  W.  Bemis,  ed., 
Municipal  Monopolies  (1899);  Major  Darwin,  Municipal  Trade  (1904); 
B.  Shaw,  The  Common  Sense  of  Municipal  Trading  (1904);  J.  S. 
Nicholson,  Principles  (1901),  bk.  v,  ch.  iv;  E.  R.  A.  Seligman,  Gov- 
ernment Ownership  of  Quasi- Public  Corporations  (Gunton's  Magazine, 
April,  1901) ;  Street  and  Electric  Railways,  1902,  (United  States  Census 
Bureau,  Special  Report,  1905)  ;  The  Merchants'  Association  of  New 
York,  Inquiry  into  the  Conditions  relating  to  the  Water  Supply  of  New 
York  (1900)  ;  Municipal  Operation  and  Public  Franchises,  a  series  of 
articles  (Municipal  Affairs,  VI,  No.  4,  1903). 

SOCIALISM:  T.  Kirkup,  History  of  Socialism  (1900);  J.  Rae,  Contem- 
porary Socialism  (?d  ed.,  1901);  E.  de  Laveleye,  Socialism  of  To-day 
(trans,  by  G.  H.  Orpen,  n.  d.) ;  A.  E.  F.  Schaeffle,  The  Quintessence  of 
Socialism  (1889)  >  W.  Sombart,  Socialism  and  the  Social  Movement  in  the 
Nineteenth  Century  (1898);  R.  C.  K.  Ensor,  Modern  Socialism  (1904); 
R.  T.  Ely,  Socialism  and  Social  Reform  (1894) ;  E.  V.  Zenker,  Anarchism, 
A  Criticism  and  History  (1898). 

SUBSIDIES  :  R.  Meeker,  History  and  Theory  of  Shipping  Subsidies 
(Am.  Econ.  Assoc.,  Publications,  3d  series,  VI,  1905) ;  W.  W.  Bates,  The 
American  Merchant  Marine  (1902);  F.  R.  Rutter,  The  International 
Sugar  Situation  (Department  of  Agriculture,  Bureau  of  Statistics,  Bulle- 
tin, No.  30,  1905). 

221.  Socialism. 

Government  was  devised  in  large  measure  to  afford  protec- 
tion and  to  subserve  the  economic  interests  of  the  community. 

559 


560  Government  and  Business.          [§  221 

From  the  very  outset  therefore  more  or  less  influence  was  ex- 
erted by  the  constituted  authorities  qn  the  progress  of  wealth. 
While  the  state,  however,  has  always  participated  in  economic 
life,  there  have  been  two  opposing  theories,  neither  realized 
in  practice,  but  both  nevertheless  advanced  as  ideals  toward 
which  human  effort  should  be  directed. 

On  the  one  hand  we  have  the  advocates  of  laisser-faire. 
Their  programme  is  "  hands-off,"  and  their  aspiration  is  to 
reduce  the  function  of  government  to  the  narrowest  possible 
limits.  The  logical  conclusion  of  such  a  theory  is  anarchy  or 
no  government.  For  even  if  we  accept  the  "  policeman  the- 
ory "  of  the  state,  —  the  doctrine  that  government  is  instituted 
only  to  protect  liberty  and  property,  —  it  is  obvious  (as  was 
pointed  out  in  Chapter  XI)  that  protection  involves  some  re- 
straint on  the  liberty  of  others.  If  therefore  restraint  or  in- 
tervention is  to  be  completely  abolished,  there  must  be  no 
restrainer,  that  is,  no  government.  While  we  may  reasonably 
object  to  the  ordinary  anarchist  who  illogically  uses  violence 
in  order  to  bring  about  the  absence  of  compulsion,  the  theoret- 
ical anarchists  like  Tolstoi  and  Kropotkin  in  Russia,  Proudhon 
and  Reclus  in  France,  Warren  and  Tucker  in  America,  are  true 
to  their  premises.  If  we  are  to  have  no  immixture  of  govern- 
ment in  the  economic  life  of  the  individual,  it  must  be  con- 
ceded that  the  only  sure  means  of  compassing  the  desired  end 
is  to  abolish  government. 

At  the  opposite  pole  are  to  be  found  those  thinkers  who 
discover  the  root  of  all  economic  evil  in  private  property. 
Here,  again,  the  logical  conclusion  is  that  of  communism,  the 
entire  sinking  of  individual  property  rights  in  those  of  the 
group.  This  is,  however,  so  manifestly  opposed  to  the  consti- 
tution of  human  nature  that  the  idea  has  remained  a  counsel 
of  perfection.  Every  communistic  experiment  has  been  more 
or  less  short-lived.  Less  thorough-going  but  almost  equally 
ideal  is  socialism,  which  is  willing  to  admit  private  property  in 
consumption,  but  demands  a  community  of  production,  that 
is,  the  assumption  by  organized  society  of  all  the  means  of  pro- 


§  221]  Socialism.  561 

duction.  According  to  the  "  scientific  socialists  "  private  prop- 
erty in  the  means  of  production  is  an  anachronism. 

While  socialistic  theories  are  almost  as  old  as  economic 
speculation  itself,  it  is  only  since  the  advent  of  the  modern  in- 
dustrial system  that  socialism  has  taken  a  deep  hold  on  the 
mass  of  men.  This  is  obviously  due  to  the  fact  of  the  prodigious 
increase  of  wealth,  coupled  with  the  triumphant  march  of  de- 
mocracy, —  both  of  them,  as  we  know,  the  results  of  industrial 
capitalism  and  the  factory  system.  The  unlocking  of  the  secrets 
of  nature,  the  conquests  of  new  worlds,  and  the  vast  opportu- 
nities opened  to  private  initiative  have  made  this  the  era  of 
individualism.  The  hardy,  the  venturesome  and  the  conspicu- 
ously able,  together  with  the  adroit,  the  fortunate  and  the  occa- 
sionally unscrupulous,  have  hailed  the  advent  of  these  well-nigh 
limitless  chances  to  forge  ahead,  with  but  scant  regard  to  the 
coincidence  between  their  interests  and  those  of  others.  The 
Anglo-Saxon  "  Each  for  himself,  and  the  devil  take  the  hind- 
most," like  the  Romanic  "  God  helps  him  who  helps  himself," 
has  been  the  watchword  of  modern  economic  life. 

In  contrast  to  this  idea  is  to  be  noticed  the  solidification  of 
a  wage- earning  class,  now  definitely  separated  from  the  owner- 
ship of  the  tools  of  production.  Their  very  progress  to  a  more 
human  standard  of  life  has  made  them  painfully  conscious 
of  the  inequalities  of  wealth  and  opportunity,  of  crying  social 
evils  and  miscarriages  of  justice,  and  of  the  seizure  by  indi- 
viduals of  much  that  seems  to  them  the  national  heritage.  In- 
stead of  being  the  voice  of  envy  and  confiscation,  as  it  often 
appears  to  the  smug,  the  sleek  and  the  contented,  socialism  is 
to  the  elect  few  an  inspiring  ideal  and  a  veritable  religion ; 
while  in  the  case  of  the  mass  it  is  an  inarticulate  cry  of  anguish 
and  a  vague  expression  of  the  demand  for  social  progress. 

Yet  with  all  its  inspired  ideals  socialism  is  as  one-sided  as 
anarchism.  If  anarchism  forgets  the  state,  socialism  forgets 
the  individual.  If  anarchism  exaggerates  the  possibilities  of 
private  action,  socialism  exaggerates  those  of  public  action. 
The  economic  theory  of  "  scientific  socialism  "  is,  as  we  have 

36 


562  Government  and  Business.         [§222 

repeatedly  seen,  completely  erroneous.  It  starts  out  with  the 
defective  labor  theory  of  value ;  it '  unjustifiably  restricts  labor 
to  manual  labor ;  it  misconceives  the  theory  of  profits  ;  and  it 
erects  into  a  veritable  fetish  the  doctrine  of  class  conflict.  So- 
cialism as  a  movement,  however,  is  not  bound  up  with  any  such 
scientific  or  unscientific  theories.  Practical  discontent,  not  sci- 
entific formulae,  has  engendered  modern  socialism ;  to  Lassalle 
and  not  to  Marx  must  be  ascribed  the  real  paternity  of  social- 
ism as  a  practical  movement. 

In  his  anxiety  to  escape  from  the  evils  of  the  present,  the 
socialist  is  willing  to  entrust  himself  to  the  fortunes  of  a  dubious 
future.  Impatient  of  the  shortcomings  of  distribution,  he  does 
not  realize  that  his  scheme  will  endanger  production.  Desir- 
ous of  eliminating  profits,  he  does  not  see  that  he  will  stifle 
progress.  In  his  effort  to  remove  actual  inequalities  he  bids 
fair  to  reduce  economic  life  to  the  hopeless  level  of  a  dull  and 
low  uniformity.  With  human  nature  as  it  exists  at  present, 
and  as  it  bids  fair  to  continue  for  an  incalculable  future,  social- 
ism, if  ever  realized  in  practice,  would  be  the  death  knell  of 
economic  advance  and  true  social  betterment. 

222.   Development  of  Public  Ownership. 

To  affirm,  however,  that  socialism,  or  the  assumption  by 
government  of  all  the  means  of  production,  is  theoretically  in- 
defensible and  practically  injurious,  does  not  imply  that  the 
government  must  refrain  from  assuming  any  of  the  means  of 
production.  If  there  are  any  criteria  by  which  to  distinguish 
between  different  kinds  of  enterprises,  it  is  possible  to  advo- 
cate government  ownership  in  some  cases  without  incurring 
the  imputation  of  socialism,  or  involving  the  necessary  accept- 
ance of  government  ownership  in  other  cases. 

It  may  be  laid  down  in  general  that  there  are  three  con- 
ditions of  government  ownership.  The  government  must  do 
what  the  private  individual  cannot  do,  will  not  do  and  ought 
not  to  do.  Private  enterprise  can,  for  instance,  no  longer 
provide  an  army  or  a  navy.  Again,  private  enterprise  was  not 


§  222]  Public  Ownership.  563 

willing  to  construct  the  first  New  York  subway.  Finally,  it  is 
universally  agreed  that  such  matters  as  justice  and  police  pro- 
tection ought  not  to  be  left  as  formerly-to  private  individuals. 
There  is,  however,  still  a  large  fringe  of  occupations  where 
there  is  an  opportunity  of  discussion  as  to  whether  private  in- 
dividuals ought  to  be  permitted  to  carry  on  the  enterprise.  It 
is  in  this  fringe  that  the  modern  problem  of  government  owner- 
ship has  arisen. 

Government  enterprise  in  such  occupations  may  be  divided 
into  fiscal  and  social  monopolies.  The  government  may  decide 
to  monopolize  a  business  for  purely  fiscal  reasons.  In  the  case 
of  certain  raw  materials  or  easily  manufactured  articles  of  wide 
consumption  which  readily  lend  themselves  to  the  purposes  of 
taxation,  the  government  may  prefer  to  conduct  the  operation 
itself  and  to  enjoy  the  monopoly  profits.  Thus  some  of  the  Euro- 
pean governments  have  a  monopoly  of  the  sale  or  sometimes 
of  both  the  sale  and  the  manufacture  of  tobacco.  In  others 
we  find  a  government  monopoly  of  salt,  and  in  the  Eastern 
countries  we  find  monopolies  of  opium,  of  tin  and  of  other 
commodities.  The  monopoly  of  spirits,  however,  as  in 
Russia,  Switzerland  and  South  Carolina,  is  only  partly  fiscal 
in  character. 

A  consideration  of  fiscal  monopolies  belongs  properly  to  the 
science  of  finance.  It  may  be  said,  nevertheless,  that  in  the 
most  progressive  countries  fiscal  monopolies  are  not  desirable, 
because  the  government  at  best  secures  as  revenue  only  the 
surplus  between  cost  and  selling  price,  while  in  the  case  of  pri- 
vate competition  there  would  be  a  tendency  for  cost  to  fall. 
In  the  former  case,  therefore,  the  public  really  loses  more 
than  the  government  receives,  while  in  the  latter  case  the 
government  may  secure  the  same  revenue  through  indirect 
taxation,  and  the  price  of  the  product  to  the  consumer  will 
nevertheless  be  lower.  When  the  political  objections  to  a  high 
indirect  tax,  however,  seem  considerable,  or  when  the  chances 
of  private  competition  are  increasingly  remote,  it  may  be  wise 
to  secure  the  desired  revenue  by  fiscal  monopoly. 


564  Government  and  Business.          [§  222 

Some  fiscal  monopolies,  indeed,  are  no  longer  tolerated  by 
public  opinion.  This  is  in  general  true  of  lotteries,  which 
were  extensively  employed  in  former  times :  especially  in 
America  many  churches  and  educational  institutions  were 
started  through  this  agency.  Government  lotteries  were  prob- 
ably based  on  the  quaint  defence  of  Petty  in  the  seventeenth 
century :  "  A  lottery  is  properly  a  tax  upon  unfortunate  self- 
conceited  fools.  The  world  abounds  in  such  fools ;  it  is  not 
fit  that  every  man  that  will  may  cheat  every  man  that  would 
be  cheated.  Rather  it  is  ordained  that  the  Sovereign  should 
have  guard  of  these  fools,  even  as  in  the  case  of  lunatics  and 
idiots."  Nowadays,  by  a  revulsion  of  popular  feeling,  not  only 
public  but  private  lotteries  have  disappeared  in  Anglo-Saxon 
countries.  The  continuance  of  the  government  lottery  in 
southern  Europe  and  in  even  so  enlightened  a  country  as 
Prussia  is  as  surprising  as  it  is  deplorable. 

Contrasted  to  the  fiscal  monopolies  of  government  are  the 
social  monopolies,  that  is,  enterprises  which  are  undertaken 
by  government  for  general  social  reasons.  If  we  look  at  the 
existing  examples  of  government  ownership,  we  shall  find  that 
they  may  be  included  under  the  following  heads: 

I.  Transfer  of  values:    (i)    Coinage;    (2)    Non-Metallic 
Money;    (3)   Banking. 

II.  Transfer  of  Products :    (i)   Markets;    (2)    Docks  and 
Piers. 

III.  Transmission  of  Intelligence  :  (i)  Post-Office  ;  (2)  Tele- 
graph ;   (3)  Telephone. 

IV.  Transportation  of  Persons  and  Freight:    (i)   Roads; 
(2)  Canals ;   (3)  Ferries ;  (4)  Bridges ;  (5)  Railroads  ;  (6)  Ex- 
press Companies. 

V.  Transmission  of  Utilities  and  Power:    (i)  Waterworks; 
(2)    Gas    and    Electric    Light    Works;     (3)    Electric   Power 
Works;  (4)  Steam-Heat  and  Hot- Water  Lines;  (5)  Irrigation 
and  Power  Canals. 

What  is  common  to  all  these  enterprises  is  that  they  are  of 
fundamental  social  importance,  and  either  lie  or  may  lie  at  the 


§  222]  Social  Monopolies.  565 

basis  of  general  industry.  This  is,  in  fact,  the  criterion  which 
distinguishes  them  from  ordinary  occupations,  —  the  existence 
of  a  sufficiently  widespread  common  interest  and  public  im- 
portance to  warrant  their  assumption  by  the  government 
authorities.  This  interest  and  importance  did  not  always  ex- 
ist, do  not  everywhere  exist  at  present,  and  are  not  found  in 
the  same  degree  in  the  various  occupations  or  countries.  With 
wide  variations  in  detail,  we  can  trace  a  general  law  of  develop- 
ment, in  five  stages  : 

1 i )  Everywhere  at  first  all  of  the  above  enterprises  are  in 
private  hands,  and  are  used  for  purposes  of  profit  and  some- 
times of  extortion,  like  the  highways,  the  coinage  and  the  post 
offices  of  mediaeval  Europe,  or  the  early  bridges,  canals  and 
markets. 

(2)  In  the   next   stage  they  are   "affected  with  a  public 
interest  "  and  are  turned  over  to  trustees  who  are  permitted  to 
charge  fixed  tolls,  but  required  to  keep  the  service  up  to  a 
certain  standard.     This  was  the  era  of  the  canal  or  turnpike 
trusts  and  companies. 

(3)  In  the  subsequent  stage  the  government  assumes  the 
business,  but  manages  it  for  profit,  as  is  still  the  case  in  some 
countries  with  the  postal  and  railway  systems. 

(4)  In  the  fourth  stage  the  government  charges  tolls  or  fees 
to  cover  expenses  only,  as  was  recently  true   of  canals   and 
bridges,  and  as  is  the  theory  of  the  postal  system  and  municipal 
water  supply  in  America  to-day. 

(5)  In   the   final   stage  the  government  reduces  charges 
until  finally  the  service  is  free  and  the  expenses  are  defrayed 
by  a  general  tax  on  the  community.     This  is  the  stage  now 
reached  in  the  common  roads,  in  the  coinage,  in  most  of  the 
canals  and  bridges,  and  which  has  been  seriously  proposed  by 
officials  of  several  American  cities  for  other  services,  like  the 
water  supply. 

It  is  obvious,  however,  that  many  of  the  industries  referred 
to  have  not  gone  through  the  whole  of  this  evolution,  and  that 
some  of  them  still  remain  in  the  first  stage.  It  is  also  clear 


566  Government  and  Business.          [§  223 

that  where  we  find  other  isolated  examples  of  government 
ownership,  as  in  the  case  of  powder  mills  or  shipyards  or 
ordnance  factories  or  even  in  the  insurance  business  and  frozen 
meat  transportation  of  Australasia,  we  must  ascribe  them  to  the 
sense  of  the  overwhelming  public  importance  of  the  enterprise 
and  the  inadequacy  or  proven  unfitness  of  private  individuals 
to  conduct  them.  What,  then,  are  the  reasons  that  weigh  with 
some  communities  in  inducing  them  to  permit  industries  of 
paramount  public  importance  to  remain  in  private  hands? 

223.   Conditions  of  Public  Ownership. 

The  three  conditions  which  must  be  carefully  weighed  before 
government  ownership  and  management  of  any  industry  are 
decided  upon  are :  ( i )  the  simplicity  or  complexity  of  the 
enterprise;  (2)  the  amount  of  capital  invested ;  and  (3)  the 
effectiveness  or  ineffectiveness  of  social  control. 

In  the  case  of  the  industries  included  on  page  564  under 
the  head  of  transfer  of  values  there  is  comparatively  little  dis- 
cussion. The  coinage  of  money  is  now  everywhere  conceded 
to  be  a  public  function.  In  the  case  of  the  banking  business, 
however,  which  is  far  more  complex,  calls  for  a  large  capital 
and  is  easily  made  amenable  to  public  control,  the  decision  is 
clearly  in  favor  of  private  ownership.  The  only  moot  question 
is  as  to  whether  the  paper  currency  should  be  issued  by  private 
banks  or  by  the  government.  The  decision  of  this  question  is, 
as  we  have  seen,  largely  dependent  upon  political  conditions. 

Coming  to  the  industries  mentioned  under  the  second  head, 
it  is  to  be  noted  that  the  markets,  which  in  the  middle  ages 
were  almost  exclusively  private,  are  now  generally  in  public 
hands.  In  England  as  elsewhere  in  Europe  the  vested  rights 
of  individuals  in  the  markets  are  being  bought  out  by  the  local 
corporations.  In  America  the  large  provision  markets  are  fre- 
quently owned  by  the  cities,  and  yield  a  substantial  income. 
In  the  case  of  the  docks  and  piers,  much  the  same  develop- 
ment has  taken  place.  In  America  the  progress  has  not  been 
so  rapid  as  abroad,  but  in  cities  like  New  York  the  municipali- 


§  223]  Government  Post.  567 

zation  of  the  water  front   is   leading  to  a  great  increase   of 
facilities  as  well  as  of  public  revenue. 

When,  however,  we  come  to  the  last  three  classes  in  the 
schedule,  we  reach  burning  problems.  In  a  few  of  the  sub- 
divisions, indeed,  the  controversy  has  been  laid  to  rest.  For 
instance,  in  the  case  of  the  common  highways  the  process  is 
about  complete  and  the  private  turnpike  companies  have  well 
nigh  disappeared.  In  certain  rural  sections  there  is  still  some 
debate  as  to  whether  the  roads  should  be  toll  roads  or  free 
highways,  but  in  general  it  may  be  said  that  the  discussion 
has  ceased. 

The  same  is  true  in  the  main  of  bridges  and  canals.  The 
old  private  canals  have  almost  entirely  vanished,  and  it  is  only 
about  a  quarter  of  a  century  ago  that  canal  tolls  were  abolished 
on  the  Erie  Canal.  In  the  case  of  ferries  a  similar  development 
is  to  be  noted ;  in  Boston  and  New  York  City  the  process  of 
municipalization  is  proceeding  apace. 

The  same  considerations  apply  to  the  fourth  class  of  indus- 
tries. Everybody,  with  the  exception  of  extreme  individualists 
like  Herbert  Spencer,  is  agreed  that  the  post-office  should  be 
in  public  hands.  The  amount  of  capital  invested  is  insignifi- 
cant, nothing  being  needed  but  the  sites  and  buildings  and  a 
few  simple  devices  for  stamping  and  transporting  the  letters ; 
the  management  also  is  comparatively  simple.  Yet  even  in 
the  post-office  it  is  a  notorious  fact  that  government  manage- 
ment is  more  costly  than  private  management.  An  American 
postmaster-general  once  stated  that  if  he  were  at  the  head  of 
a  private  company  he  could  perform  the  postal  business  about 
one-fourth  cheaper,  by  a  more  effective  administration  and  con- 
solidation of  post-offices,  which  is  now  impossible  because  of 
political  conditions. 

Nevertheless,  no  one  would  think  of  abandoning  the  govern- 
ment postal  service.  The  only  controversy  arises  over  what  are 
in  other  countries  ancillary  features  of  the  service.  Such,  for 
instance,  is  the  parcels  post.  Almost  everywhere,  except  in 
the  United  States,  this  is  a  well-recognized  postal  function; 


568 


Government  and  Business.  [§  223 


here,  however,  the  private  express  companies  are  so  firmly 
intrenched  that  there  seems  little  prospect  of  altering  the  situ- 
ation. Yet  all  the  arguments  in  favor  of  a  letter  post  would 
apply  almost  equally  well  to  a  parcels  post. 

In  the  case  of  the  telegraph  practically  the  same  is  true. 
The  investment  of  capital  is  indeed  somewhat  greater  than  in 
the  case  of  the  post,  but  it  is  still  insignificant  as  compared 
with  other  interests,  while  the  complexity  of  management  is 
likewise  slight.  In  every  other  country  in  the  world,  including 
England,  Australasia  and  Switzerland,  the  telegraph,  although 
frequently  starting  out  in  private  hands,  has  been  brought 
under  government  management.  In  the  United  States,  in 
fact,  the  telegraph  began  as  a  government  business  in  1844, 
and  was  abandoned  chiefly  because  the  postmaster-general  at 
that  time  erroneously  thought  that  it  would  prove  a  dire  fail- 
ure, and  did  not  desire  to  commit  the  government  to  a  haz- 
ardous experiment.  Yet  the  originator  of  the  telegraph,  who 
was  wise  enough  to  appreciate  the  final  outcome,  did  not  con- 
ceal his  opinion  that  it  ought  to  form  a  natural  adjunct  to  the 
government  post-office. 

The  chief  reason  why  there  is  not  a  louder  outcry  for  a 
government  .telegraph  is  that  the  abuses  of  the  private  tele- 
graph are  not  important.  On  the  other  hand,  it  must  not  be 
forgotten  that  while  postal  rates  are  lower  here  than  abroad, 
telegraph  rates  are  much  higher,  for  short  as  well  as  for  long 
distances.  The  use  of  the  telegraph  service  in  the  United 
States  can  accordingly  not  be  compared  with  that  in  other 
countries.  Every  argument  in  favor  of  government  post  applies 
almost  equally  to  the  telegraph. 

Virtually  the  .same  is  true  of  the  telephone.  The  complex- 
ity of  management  is  indeed  slightly  greater  than  in  the  tele- 
graph, and  it  requires  somewhat  more  care  to  keep  up  to  the 
level  of  modern  science.  Nevertheless  the  difference  is  not 
material.  Most  countries  have  nationalized  their  telephone 
system,  and  even  in  England,  where  the  private  telephone  was 
at  first  in  complete  control  of  the  field,  recent  legislation  has 


§  223]          Telegraphs  and  Railways.  569 

paved  the  way  for  its  assumption  by  the  government.  Under 
government  management  abroad  telephone  rates  are  far  lower, 
and  the  use  by  the  public  far  greater  than  in  the  United 
States.  In  both  the  telegraph  and  the  telephone  a  large  part 
of  what  in  the  United  States  constitutes  the  profits  of  a  private 
monopoly  accrues  elsewhere  to  the  public  in  the  shape  of 
lower  charges  and  wider  usefulness. 

On  the  other  hand,  while  the  arguments  hitherto  advanced 
would  lead  to  governmental  assumption  of  the  telegraph  and 
the  telephone,  they  would  lead  to  precisely  the  opposite  con- 
clusion in  the  case  of  railways.  There  are,  in  fact,  three  sets  of 
arguments  against  government  railways,  —  the  economic,  the 
fiscal  and  the  political  argument. 

(1)  The  railway  is  the  most  stupendous  of  modern  indus- 
tries.    Not  only  is  the  capital  account  enormous,  but  the  rail- 
way business  calls  for  the  most  delicate  handling,  and  must 
needs  pay  for  the  highest  possible  business  ability.     Railway 
presidents  of  single  lines  to-day  receive  salaries  superior  to 
that  of  the  President  of  the  United  States ;  for  without  con- 
summate capacity  the  attempt  to  run  a  railway  would  be  a 
failure.     The  time  may  come  in  the  distant  future  when  de- 
mocracy will  be  willing  to  pay  higher  salaries,  and  when  the 
ablest  men  will  be  ready  to  give  up  comfort  and  wealth  for 
the  more  ideal  end  of  serving  the  public.     Under  present  con- 
ditions in  the  United  States,  however,  to  turn  over  the  greatest, 
the  most  complex  and  the  most  fundamental  industry  of  mod- 
ern times  to  the  government  would  inevitably  lead  to  such  a 
decrease  in  efficiency  as  to  become  well-nigh  intolerable. 

(2)  The  revenues  and  expenditures  of  our  railways  are  about 
triple  those  of  the  government.    The  entire  budget  would  then 
depend  upon  the  temporary  prosperity  or  ill  fortune  of  the 
railway  system.     In  bad  times  the  railway  revenues  shrink  by 
tens  or  even  hundreds  of  millions.     This  would  so  embarrass 
the  income   side   of  the  national  budget  as  to  necessitate  a 
complete  revolution  not  only  in  our  tax  system,  but  also  in 
our  entire  budgetary  methods.     This   point,   hitherto   almost 


57°  Government  and  Business.          [§  224 

completely  overlooked,  would  in  itself  suffice  to  defeat  the 
scheme  for  government  railways. 

(3)  In  comparison  with  railway  charges  within  the  country, 
tariff  rates  into  the  country  are  of  slight  importance.  The 
political  demoralization  that  occurs  whenever  a  new  tariff  is 
framed  is  familiar  to  all.  The  imagination  shrinks  from  the 
thought'  of  what  would  happen  in  the  United  States  if  the  nec- 
essarily continuous  manipulation  of  railway  rates  were  entrusted 
to  the  tender  mercies  of  the  legislature,  or  of  an  administrative 
body  under  its  immediate  influence. 

These  arguments  against  government  railways  in  the  United 
States  do  not  of  course  imply  that  the  railways  should  be  let 
alone.  Social  control  of  private  railways,  however,  has  as  yet 
scarcely  begun,  and  until  the  ineffectiveness  of  social  control 
has  been  affirmatively  proven  it  would  be  rash  in  the  extreme 
to  plunge  into  government  ownership. 

224.  Municipal  Monopolies. 

There  still  remain  for  discussion  the  fifth  class  of  busi- 
nesses mentioned  on  page  564.  It  will  be  observed  that  with 
the  exception  of  the  last  item  they  have  two  points  in  com- 
mon :  they  are  local  enterprises  and,  because  they  depend  on 
the  use  of  the  streets  which  cannot  be  continually  torn  up, 
they  tend  to  become  monopolies.  It  is  for  these  reasons  that 
they  are  usually  called  municipal  monopolies,  or  public  utili- 
ties ;  and  because  of  these  facts  the  street  railways  or  omnibus 
lines  are  ordinarily  included  in  the  same  category. 

In  the  United  States  municipal  ownership  has  been  common 
in  the  case  of  waterworks,  somewhat  less  usual  in  electrical 
lighting,  rare  in  gas  works,  and  only  just  beginning  in  street 
railways.  In  Great  Britain,  on  the  other  hand,  waterworks 
have  ordinarily  been  in  private  hands,  but  gas  works  to  a  large 
extent  under  municipal  control,  while  of  late  there  has  been 
a  marked  tendency  toward  municipal  tramways  and  electric 
lines.  In  1902,  for  instance,  there  were  118  municipal  tram- 
ways with  855  miles  of  track,  as  compared  to  115  private 


§  224]  Municipal  Monopolies.  571 

tramways  with  598  miles  of  track.  In  the  United  States,  in 
1902,  fifty-three  per  cent  of  all  waterworks  were  in  the  hands 
of  the  public,  and  in  cities  of  over  8,000  population  the  water- 
works were  owned  by  the  municipalities  in  135  cases,  by  pri- 
vate companies  in  only  36  cases ;  while  the  gas  works  were 
owned  by  the  cities  in  only  5  cases,  by  private  companies  in 
130  cases.  At  the  same  date  only  13  cities  owned  their  elec- 
tric lighting  plant.  The  sole  examples  of  a  municipal  street 
railway  in  1905  were  the  New  York  and  Boston  subways, 
though  Chicago  was  endeavoring  to  assume  the  ownership  and 
management  of  its  street  railways. 

In  the  case  of  the  water  supply  the  arguments  are  decidedly 
in  favor  of  municipal  ownership.  The  social  interests  are  of 
the  most  commanding  importance,  and  there  is  the  utmost 
simplicity  of  management.  When  the  watershed,  the  aqueduct 
and  the  water-pipes  are  ready,  nothing  is  needed  but  a  few 
engineers  to  regulate  the  pressure  and  a  few  workmen  to  re- 
pair leaks.  It  is  true,  indeed,  that  with  the  growth  of  cities  the 
necessary  capital  augments,  until  as  in  the  case  of  New  York 
tens  of  millions  may  be  needed.  On  the  other  hand  it  must 
be  remembered  that  water  rates  can  easily  be  fixed  at  such  a 
point  that,  without  unduly  burdening  the  public,  they  will  be 
sufficient  to  defray  interest  on  the  debt  as  well  as  the  running 
expenses.  Even  here,  however,  the  experience  of  our  large 
cities  shows  how  important  is  a  good  system  of  municipal 
accounting  in  order  that  the  capital  and  income  accounts  may 
be  kept  distinct,  and  in  order  that  the  public  may  understand 
what  is  the  actual  cost  of  the  enterprise. 

With  the  gas  business  the  matter  is  not  so  simple.  Here 
the  complexity  of  management  is  considerably  greater.  The 
stimulus  of  private  initiative  is  needed  to  a  far  greater  extent 
in  order  that  the  management  may  avail  itself  of  the  constant 
improvements  in  the  process,  thus  leading  to  a  reduction  of 
cost.  In  the  one  great  example  of  municipal  gas  ownership 
that  has  existed  in  America,  —  namely,  in  Philadelphia,  —  the 
results  were  satisfactory  neither  to  the  treasury  nor  to  the  con- 


572  Government  and  Business.          [§  224 

sumer.  Whatever  may  be  said  of  the  dubious  methods  em- 
ployed by  the  private  monopoly  to  which  Philadelphia  has 
farmed  out  the  management  of  the  gas  service,  there  is  little 
doubt  that  the  consumer  as  well  as  the  city  has  profited  in  a 
noteworthy  degree. 

In  the  case  of  the  electric  light  the  arguments  in  favor  of 
municipal  ownership  are  somewhat  more  convincing,  at  all 
events  in  the  smaller  towns,  where  natural  conditions  are  favor- 
able and  where  the  outlay  is  relatively  inconspicuous.  Although 
the  complexity  of  the  enterprise  is  largely  minimized,  consider- 
able care  must  still  be  observed  in  the  financial  management. 

Finally,  with  street  railways  the  arguments  for  municipal 
operation  are  less  strong  than  in  either  the  water  or  the  elec- 
tric light  supply.  For  here,  although  the  complexity  of  man- 
agement is  by  no  means  so  great  as  in  the  ordinary  railroad,  it 
is  of  far  more  importance  than  in  the  telegraph,  the  telephone 
or  waterworks.  It  is  unlikely  that  the  municipal  authorities 
of  any  American  city  would  have  had  the  courage  to  undertake 
such  great  revolutions  in  the  methods  of  transportation  as 
have  been  completed  during  the  last  decade  in  our  chief  cities. 
Furthermore,  the  financial  problems  involved  are  intricate. 
Even  if  municipal  ownership  be  decided  upon,  however,  the 
argument  would  seem  to  be  in  favor  of  following  the  plan  of 
the  New  York  subway,  —  namely,  government  ownership  but 
private  management  under  conditions  fixed  by  the  municipality, 
which  should  safeguard  the  social  interests  of  the  community, 
the  needs  of  the  treasury,  and  especially  the  legitimate  de- 
mands of  the  employees.  In  this  way  the  best  features  of  each 
system  might  be  retained. 

It  is  obvious,  then,  that  in  considering  this  problem  we  must 
not  be  led  away  by  preconceived  notions  on  either  side.  The 
outcry  of  socialism  is  a  bugaboo,  for  in  these  enterprises  free 
competition  is  inapplicable.  The  only  choice  is  between  a  pub- 
lic monopoly  and  a  private  monopoly  under  social  regulation. 
The  problem  is  not  simply  the  abstract  one  of  the  general  lim- 
its of  government  activity,  but  che  very  concrete  one  as  to  how 


§  225]  Government  Regulation.  573 

far  the  practical  political  conditions  in  any  locality  permit  of 
the  application  of  the  abstract  principle.  We  may  all  agree 
that  in  these  enterprises  the  public  element  is  the  predomi- 
nant one.  We  may  all  concur  in  the  belief  that  even  where  it 
seems  desirable  to  retain  for  a  time  the  management  in  pri- 
vate hands,  the  period  may  come  when  the  advantages  to  be  / 
derived  from  private  management  under  social  control  will  be  ^"" 
outweighed  by  the  benefits  of  direct  government  operation. 
Yet  in  a  democracy  it  is  always  wise  to  make  haste  slowly  and 
to  refrain  from  taking  a  leap  in  the  dark.  It  is  more  than  likely 
that  the  future  has  in  store  a  complete  transference  of  quasi- 
public  enterprises  to  the  public  itself,  if  for  no  other  reason 
than  to  check  the  corruption  and  control  of  local  politics  by 
vast  business  enterprises.  Until  general  economic  and  politi- 
cal conditions,  however,  are  ripe  for  such  a  radical  change,  the 
probable  result  would  be  the  substitution  of  one  kind  of  cor- 
ruption for  another,  and  the  realization  of  an  abstract  principle 
at  the  cost  of  efficiency  and  progress.  That  social  control  of 
quasi-public  enterprises  will  in  the  near  future  undergo  a 
marked  development  is  beyond  all  question.  But  it  is  not 
until  social  control  has  been  tested  and  found  wanting  that 
we  shall  be  ready  for  the  further  step  of  public  management 
of  the  gas  supply  and  the  street  railways. 

225.   Government  Regulation. 

If  government  ownership,  is,  as  we  have  seen,  limited  to  a 
comparatively  narrow  range  of  occupations,  government  regu- 
lation of  private  enterprise  is  widespread.  There  are  two 
currents  discernible  in  the  course  of  history :  one  has  set  away 
from  government  interference  ;  the  other  in  its  direction.  The 
progress  of  liberty  and  the  recognition  of  the  advantages  of 
competition  in  modern  times  have  caused  the  government 
to  abandon  many  forms  of  regulation  which  were  common 
in  ancient  and  mediaeval  civilizations,  but  the  complexity  of 
modern  capitalism  and  the  abuses  of  freedom  have  neces- 
sitated the  development  of  new  kinds  of  government  activity. 


574  Government  and  Business.          [§  225 

The  chief  forms  of  modern  government  interference  with 
private  industry  may  be  put  under  the  four  heads  of  action  in 
behalf  of  consumers,  of  producers,  of  investors  and  of  the 
community  in  general. 

(1)  In  the  middle  ages  the  government  interposed  in  behalf 
of  the  consumers  either  to  guarantee  good  work  or  to  insure 
reasonable  price.     Both  of  these  forms  of  interference  have 
disappeared  in  general   industry  to-day,  because  custom  has 
been  replaced  by  competition.     The  producer  who  gives  short 
measure  or  turns  out  a  defective  product  or  charges  an  exor- 
bitant price  cannot  retain  the  trade  in  the  face  of  competition. 
It  is  only  where  competition  disappears,  as  in  the  case  of  the 
actual  monopolies  discussed  in  the  preceding  sections  of  this 
chapter,  that  social  control  becomes  requisite.     Unregulated 
private  monopoly  is  a  menace  to  the  consumer.     In  modern 
times,  accordingly,  we  find  that  the  chief  form  of  interference 
with  competitive  industry  in  behalf  of  the  consumer  is  legisla- 
tion to  safeguard  health,  as  in  the  case  of  food  inspection  and 
quarantine  regulation. 

(2)  On  the  other  hand,  the  interests  of  the  laborer  have 
been  so  materially  affected  by  the  advent  of  the  factory  sys- 
tem that  modern  interference  on  behalf  of  the  producers  is 
well-nigh  exclusively  limited  to  them.     As  we  have   learned 
(§    181),  there  are   five   classes    of  such  interference,  all  of 
which,  except  the  last,  are   rapidly  becoming  universal :    (a) 
legislation  to  safeguard  health,  through  the  so-called  factory 
laws,   applicable    to    men,    women    and    children    alike ;    (b} 
legislation  to  ensure  safety  through  employers'  liability  laws ; 

(c)  legislation  fixing  maximum  hours  of  work,  as  in  the  case 
of  the    eight-hour    law   for   miners    and    public    employees ; 

(d)  compulsory  insurance  against  illness,  old   age  or  lack  of 
employment ;  and  finally  (e)  legislation  fixing  minimum  wages, 
as  in  Australia  and  New  Zealand. 

While  the  advisability  of  some  particular  application  of  this 
principle  in  a  given  country  is  naturally  open  to  question, 
there  is  no  longer  any  doubt,  as  we  have  learned  in  a  previous 


§  225]  Usury  Laws.  575 

chapter  that  such  forms  of  interference  are  not  necessarily 
incompatible  with  the  highest  ideal  of  liberty,  in  the  positive 
and  social  sense.  Experience  alone  can  disclose  the  line 
beyond  which  such  legislation  may  imperil  business  enterprise 
and  thus  injure  the  prospects  of  the  laborer  himself.  To  the 
social  economist,  however,  who  remembers  that  the  objective 
is  man  in  relation  to  wealth  rather  than  wealth  in  relation  to 
man,  the  prosperity  of  a  so-called  successful  business  which 
rests  upon  a  degraded  and  miserable  labor  force  is  illusory  and 
not  really  worth  having. 

(3)  In  former  times  the  striking  example  of  interference 
by  government  in  case  of  investment  was  in  behalf  of  the 
borrower.  The  usury  laws,  designed  to  protect  the  unfortunate 
debtor,  have,  as  we  know  (§  171),  been  rendered  almost  com- 
pletely unnecessary  through  the  growth  of  competition  in  the 
loan  of  capital.  This  same  development  has,  however,  brought 
about  the  need  of  intervention  of  the  opposite  kind.  To-day 
it  is  the  lender  or  investor  in  corporate  enterprise,  and  not  the 
borrower,  who  requires  protection.  Nowadays  it  is  rare  to  find 
any  one  who  is  not  a  depositor  in  a  savings  bank,  a  policy  holder 
in  an  insurance  company,  a  stockholder  in  a  railroad  or  other 
corporation,  or  the  possessor  of  a  bank  note  or  a  bank  account. 
So  wide  and  intricate  are  the  ramifications  of  modern  credit 
and  finance  that  investors  or  creditors  are  obliged  to  rely  more 
or  less  implicitly  on  the  representations  and  good  faith  of  the 
managers  of  these  enterprises.  Sad  experience,  however,  has 
shown  that  the  conception  of  real  trusteeship  among  those 
entrusted  with  the  funds  of  others  is  by  no  means  so  sacred 
as  it  ought  to  be ;  and  government  has  been  obliged  every- 
where to  take  precautions  to  define  and  to  enforce  responsi- 
bility. Here,  again,  there  are  dangers  on  both  sides,  the  risk 
of  over-rigidity  which  will  hamper  legitimate  enterprise,  and 
the  danger  of  lax  accountability  which  will  destroy  confidence. 
That,  however,  some  solid  measure  of  regulation  is  requisite 
can  no  longer  be  successfully  disputed. 


Government  and  Business.          [§  226 


226.     Bounties  and  Subsidies. 

We  come,  finally,  to  the  case  of  government  interference  in 
behalf  of  the  general  interests  of  the  community.  This  takes 
the  form  of  protection,  which  has  already  been  discussed  in  a 
separate  chapter,  and  also  of  bounties  and  subsidies. 

The  danger  of  such  intervention  is  that  particular  interests 
may  foist  themselves  upon  the  legislator  in  the  guise  of  general 
interests.  Bounties  may  be  classified  as  (a}  military  bounties, 
(fr)  forest  bounties,  (?)  agricultural  and  industrial  bounties,  and 
(d)  land  transport  and  shipping  subsidies.  The  first  two  are  not 
primarily  economic  in  character  and  may  be  passed  by.  Agri- 
cultural and  industrial  bounties  were  frequent  in  former  cen- 
turies, but  disappeared  in  the  main  with  the  downfall  of  the 
mercantile  system.  The  chief  modern  example  is  that  of 
beet  sugar  in  Europe,  and  it  is  so  instructive  as  to  merit  some 
attention. 

The  continental  blockade  under  Napoleon  put  a  stop  to  the 
colonial  trade  in  cane  sugar  and  gave  an  impetus  to  the  culture 
of  beets.  After  peace  was  established  the  beet  sugar  industry 
was  strong  enough  to  claim  and  to  receive  encouragement  in 
France,  and  the  movement  spread  somewhat  later  in  other 
continental  countries.  Cane  sugar  was  shut  out,  and  as  the 
yield  of  beet  sugar  now  exceeded  the  domestic  demand,  it  be- 
came necessary  to  secure  a  foreign  market.  This  was  accom- 
plished by  exempting  sugar  for  export  from  the  internal  excise 
tax  imposed  for  revenue  purposes,  or  by  a  drawback.  The 
drawback  was  frequently  greater  than  the  excise  tax,  and  thus 
was  to  all  intents  a  hidden  bounty.  Other  countries  even 
granted  direct  bounties  on  export. 

The  effect  of  this  legislation  was  to  confine  the  market  of 
each  country  to  domestic  sugar,  to  raise  prices  greatly  at  home, 
to  diminish  domestic  consumption,  to  provide  a  large  surplus 
for  export,  to  lower  prices  on  the  world  market  enormously, 
and  ultimately  to  cause  a  serious  financial  loss  to  each  bounty- 
granting  country.  While  the  cane  sugar  production  of  the 


§  226]  Bounties  and  Subsidies.  577 

world  increased  from  1,200,000  long  tons  in  1853-1854  to 
4,300,000  tons  in  1903-1904,  that  of  beet  sugar  rose  from 
200,000  tons  in  1853-1854  to  6,700,000  tons  in  1901-1902. 
In  the  half-century  the  proportion  of  beet  sugar  rose  from  14 
to  5  8  per  cent  of  the  total  output  of  sugar. 

The  system  of  sugar  bounties  gave  Great  Britain  cheap 
sugar  and  made  British  jams  and  preserves  world-famous ;  but 
it  ruined  the  West  Indies,  brought  about  the  Cuban  war,  and 
was  continually  more  burdensome  to  the  European  continent. 
After  several  unsuccessful  attempts  the  Brussels  convention  of 
1903,  participated  in  by  the  chief  European  countries  except 
Russia,  abolished  all  bounties  and  excessive  drawbacks  as  well 
as  all  discrimination,  beyond  a  certain  moderate  point,  in  the 
domestic  market  against  foreign  sugar.  Expenses  thereupon 
decreased  to  such  an  extent  that  many  countries  also  lowered 
their  excise  taxes.  As  a  consequence  domestic  prices  fell, 
export  prices  rose,  beet  sugar  became  more  profitable  and 
government  expenses  were  reduced. 

The  history  of  sugar  bounties  is  an  excellent  illustration  of 
the  danger  and  ultimate  inefficacy  of  agricultural  or  industrial 
bounties  on  a  large  scale.  It  is  for  this  reason  that  such 
bounties  are  now  extremely  rare.  .  In  the  United  States  the 
only  recent  examples  are  the  bounty  on  sugar,  which  was 
granted  during  the  early  nineties  for  the  four  years  that  foreign 
sugar  was  imported  duty  free,  and  the  insignificant  bounties 
for  beet  sugar  granted  by  a  few  of  the  Western  states. 

Shipping  subsidies,  on  the  other  hand,  are  still  a  topic  of 
active  discussion.  The  experience  of  the  United  States  with 
its  subsidies  to  the  Collins  and  Pacific  Mail  lines  dur- 
ing the  two  decades  from  1845  to  J867  was  so  unsatisfactory 
that  the  system  was  abandoned.  More  recently,  however,  sub- 
sidies not  only  in  the  shape  of  postal  subsidies  but  also  for 
tonnage,  and  in  some  cases  even  for  construction,  have  been 
inaugurated  by  Great  Britain,  Germany,  France,  Japan  and 
other  countries.  In  the  United  States  they  have  thus  far  been 
limited  to  postal  subsidies.  The  argument  for  shipping  sub- 

37 


578  Government  and  Business.          [§  226 

sidles  is  akin  to  that  for  protection  in  general,  which  has  already 
received  attention.  But  before  such'  subsidies  are  granted  on 
any  considerable  scale  it  must  be  shown  that  a  large  merchant 
marine  is  not  likely  to  develop  of  itself,  that  the  aid  conferred 
by  government  will  really  stimulate  the  efficient  rather  than 
shelter  the  inefficient  and  that  the  subsidy  will  not  be  confined 
to  a  few  favored  enterprises. 


CHAPTER   XXXIV. 
POVERTY   AND    PROGRESS. 

227.  References. 

Charles  Booth,  Life  and  Labour  of  the  People  in  London  (17  vols. ;  viz., 
"  Poverty,"  4  vols.,  "  Industry,"  5  vols.,  "  Religious  Influences,"  7  vols., 
Final  Volume,  i  vol.,  1902) ;  B.  S.  Rowntree,  Poverty:  A  Study  in  Town 
Life  (1901);  J.  G.  Brooks,  The  Social  Unrest  (1903);  J.  A.  Hobson, 
Problems  of  Poverty  (1891) ;  R.  Hunter,  Poverty  (1904)  ;  H.  Fawcett, 
Pauperism  :  Its  Causes  and  Remedies  (1871) ;  C.  B.  Spahr,  Distribtition  of 
Wealth  in  the  United  States  (1896) ;  H.  V.  Mills,  Poverty  and  the  State 
(1886) ;  C.  D.  Wright,  Practical  Sociology  (Am.  Citizen  Series,  1905),  chs. 
xviii,  xxv ;  D.  R.  Dewey,  [Mass.]  Report  on  the  Unemployed  (1895)  '•>  W. 
Smart,  The  Distribution  of  Income  (1899),  bk.  ii,  ch.  viii,  and  Studies  in 
Economics  (1895),  cns-  v^>  ^x> 

DESCRIPTIONS  OF  POVERTY:  C.  B.  Spahr,  America's  Working  People 
(1900) ;  W.  A.  Wyckoff,  The  Workers  (2  vols.,  1897-1899)  ;  J.  A.  Riis, 
ffmv  the  Other  Half  Lives  (1890),  and  The  Battle  with  the  Slum  (1902)  ; 
R.  A.  Woods,  The  City  Wilderness  (1898) ;  Hull  House  Maps  and  Papers 
(1895) ;  Mrs.  J.  van  Vorst  and  M.  van  Vorst,  The  Woman  who  Toils 
(1903);  A.  M.  Simons,  Packingtown  (1899)  ;  P.  Roberts,  The  Anthracite 
Coal  Communities  (1904)  ;  E.  Poole,  The  Plague  in  its  Stronghold  (1903). 

LUXURY  :  E.  de  Laveleye,  Luxury  (1891) ;  H.  M.  Thompson,  The 
Purse  and  the  Conscience  (1891). 

COST  OF  LIVING  :  W.  O.  Atwater,  Principles  of  Nutrition  and  Nutri- 
tive Value  of  Food  (United  States  Department  of  Agriculture,  Farmeri 
Bulletin,  No.  142,  rev.  ed.  1902),  and  The  Chemical  Composition  of  Amer- 
ican Food  Materials  (Office  of  Experiment  Stations,  Bulletin,  No.  28,  rev. 
ed.,  1899) ;  Atwater  and  Benedict,  Experiments  in  the  Metabolism  and 
Energy  in  the  Human  Body,  1900-1902  (Office  of  Experiment  Stations, 
Bulletin,  No.  136,  1903,  corrected  to  August,  1904);  Cost  of  Living  and 
the  Retail  Prices  of  Food  (Bureau  of  Labor,  Eighteenth  Annual  Report, 
1904) ;  H.  Higgs,  Workingmeri1  s  Budgets  (Jour.  Stat.  Soc.,  LVI,  1893). 

POOR  LAWS  AND  CHARITY:  J.  Nicholls,  History  of  the  English  Poor 
Law  (2  vols.,  1854,  new  ed.  3  vols.,  1904)  ;  A.  J.  Warner,  American 
Charities  (1894);  E.  W.  Capen,  Historical  Development  of  the  Poor  Law 
of  Connecticut  (Columbia  Stiidies,  XXII,  1904)  ;  E.  T.  Devine,  The  Prin- 
ciples of  Relief  (1904) ;  J.  Lee,  Constructive  and  Preventive  Philanthropy 

579 


580  Poverty  and  Progress.  [§  228 

(1902);  M.  E.  Richmond,  Friendly  Visiting  among  the  Poor  (1899); 
Committee  of  Fifteen,  Report  on  the  Social  Evil  (11302) ;  Jane  Addams, 
Father  Huntington,  R.  A.  Woods,  F.  H.  Giddings.  B.  Bosanquet  and 
H.  C.  Adams,  Philanthropy  and  Social  Progress  (1893)  >  National  Con- 
ference of  Charities  and  Corrections,  Annual  Reports  (1874-). 

228.  Luxury. 

In  our  study  of  the  distribution  of  wealth  attention  was 
devoted  primarily  to  the  shares  of  the  various  classes  in  distri- 
bution. To  the  individual,  however,  the  share  of  the  total 
product  that  accrues  to  the  particular  class  is  of  slight  conse- 
quence when  compared  to  his  own  participation  in  this  share. 
The  economic  problem  to  him  is  as  to  the  amount  of  wealth 
that  he  personally  can  secure.  To  the  community  as  a  whole, 
also,  it  makes  a  great  difference  whether  a  given  sum  of  wealth 
is  shared  in  an  approximately  equal  fashion  among  its  separate 
members  or  whether  a  minority  lives  in  affluence  and  the  mass 
in  squalor.  The  coexistence  of  luxury  and  poverty  has  always 
been  the  stumbling-block  of  the  social  reformer.  To  this  most 
baffling  question  we  must  now  turn  our  attention,  although 
almost  every  one  of  the  preceding  chapters  has  indirectly 
touched  upon  the  same  subject. 

The  problem  of  luxury  in  itself,  and  not  considered  as  a 
concomitant  of  poverty,  involves  few  difficulties.  The  discus- 
sion, however,  has  often  been  one-sided ;  for  here  as  elsewhere 
extremists  have  not  been  lacking.  The  apologists  for  luxury, 
for  example,  have  from  time  immemorial  sought  to  justify 
themselves  by  the  plea  that  luxurious  expenditure  is  beneficial 
because  it  affords  employment  to  labor.  The  merest  tyro  in 
economic  reasoning,  however,  will  at  once  perceive  the  weak- 
ness of  this  hoary  argument.  If  luxurious  expenditure  is 
productive  simply  because  it  employs  labor,  the  accidental 
breaking  of  a  window-pane  or  the  wanton  destruction  of  a 
growing  crop  is  also  productive  in  so  far  as  it  will  require  labor 
to  repair  the  damage.  The  fallacy  clearly  consists  in  the 
assumption  that  the  wealth  spent  in  luxurious  outlay  would 
otherwise  not  be  devoted  to  production.  Obviously,  however, 


§  228]  Luxury.  581 

if  the  spendthrift  chooses  not  to  waste  his  funds,  they  will  take 
the  form  of  the  purchase  of  securities,  of  investment  in  some 
enterprise  or  of  a  cash  balance  in  the  bank ;  and  in  each  case 
they  will  be  devoted  to  production  and  thus  give  employment 
to  labor. 

On  the  other  hand,  the  opponents  of  luxury  go  to  an  equally 
extravagant  length.  "  Plain  living  and  high  thinking  "  is  indeed 
a  most  admirable  moral  precept,  inattention  to  which  has  re- 
sulted in  the  ruin  of  many  an  individual.  The  evils  of  ostenta- 
tion and  the  passions  of  sensuality  are  as  glaring  as  they  are 
reprehensible.  From  a  broader  point  of  view,  however,  plain 
living  may  be  carried  to  an  extreme.  Civilization,  as  we  learned 
at  the  very  outset  of  this  treatise,  depends  on  the  multiplication 
of  wants.  If  goods  are  to  be  divided  into  necessaries,  con- 
veniences and  superfluities,  progress  may  be  described  as  the 
process  of  converting  superfluities  into  conveniences  and  con- 
veniences into  necessities.  The  diversification  of  consumption 
lies  at  the  root  of  human  development.  It  is  undoubtedly  true 
that  we  can  have  no  lasting  progress  without  the  accumulation 
of  capital  and  the  application  of  labor  to  raw  material ;  but  it 
is  equally  evident  that  while  a  population  every  member  of 
which  is  devoted  entirely  to  wheat-raising  or  to  the  making  of 
rough  clothes  or  shelter  may  be  very  estimable,  it  will  indis- 
putably be  lacking  in  many  of  the  qualities  that  we  associate 
with  higher  civilization.  It  would,  to  mention  nothing  else, 
leave  no  room  for  the  whole .  domain  of  art,  which  is  in  some 
respects  the  supreme  achievement  of  the  human  race.  Yet  no 
one  will  make  fine  or  beautiful  things  unless  there  is  a  demand 
for  them,  and  this  demand  necessarily  implies  luxury  some- 
where. Thus  we  seem  to  reach  the  position  that  luxury  is  evil 
and  at  the  same  time  indispensable. 

The  difficulty,  however,  is  really  not  serious.  Luxury  of  some 
kind  is  indeed  inevitable,  but  what  is  one  man's  luxury  is 
another  man's  necessity.  The  real  test  of  the  economic  legiti- 
macy of  luxury  is  the  relation  between  the  economic  importance 
of  the  outlay  and  the  economic  importance  of  the  result  to  the 


582  Poverty  and  Progress.  [§  228 

community  as  a  whole.  If  a  particular  individual  is  markedly 
important  for  the  community,  society  will  not  and  ought  not  to 
begrudge  him  a  more  or  less  lavish  expenditure  in  keeping 
with  its  estimate  of  his  public  importance.  There  is  usually  a 
close  relation  between  consumption  and  production.  It  is  true 
that  in  a  young  country  like  the  United  States  men  will  often 
accumulate  wealth  for  the  sake  of  power  and  lead  comparatively 
simple  and  busy  lives.  Almost  everywhere  else,  however,  it  is 
a  fact,  and  even  in  the  United  States  it  is  a  tendency,  for 
people  who  acquire  wealth  easily  to  spend  it  lavishly.  To  the 
extent,  therefore,  that  consumption  is  the  objective  point  of 
production,  the  prohibition  of  luxury  would  be  apt  to  work  as 
an  impediment  to  enterprise,  and  what  would  be  gained  at  one 
end  would  be  lost  at  the  other.  From  this  point  of  view  the 
luxury  of  an  individual  who  is  economically  important  in  the 
sense  that  he  is  adding  materially  to  the  productive  forces  of 
the  community  is  justifiable. 

Luxury  as  a  legitimate  economic  phenomenon  may,  however, 
be  abused  by  those  who  possess  the  wealth  or  power  without 
enjoying  the  real  social  importance.  They  spend,  but  give 
nothing  in  return.  In  the  case  of  private  individuals  the  most 
obvious  example  is  the  man  who  has  received  a  large  fortune 
by  gift  or  inheritance  and  who  has  done  and  is  doing  nothing 
of  value  to  the  community.  Luxury  of  this  kind  is  economi- 
cally injurious.  But  luxury  may  also  be  associated  with  the 
government.  Where  there  is  an  absence  of  constitutional 
liberty,  the  individual  potentate  may  abuse  the  privilege,  and 
we  reach  a  situation  like  that  in  the  time  of  Louis  XIV  in 
France,  where  the  luxury  of  the  court  proved  to  be  a  heavy 
burden  to  the  people.  In  a  democracy,  however,  this  danger 
does  not  exist,  and  there  is  even  a  risk  of  going  too  far  in  the 
opposite  direction.  The  president  of  republican  France  in- 
deed receives  a  special  allowance  for  entertainments ;  but  the 
lack  of  suitable  homes  and  adequate  salaries  for  American 
diplomatic  representatives  abroad  has  long  been  a  national 
mortification. 


§  228]  Luxury.  583 

The  real  economic  ideal  is  the  socialization  of  luxury,  in  the 
sense  either  that  private  luxury  should  give  way  to  public  luxury, 
or  that  the  luxury  of  the  individual  should  be  confined  to  those 
who  are  of  true  importance  to  the  community  and  who  are 
transfused  by  the  sense  of  social  responsibility.  The  economic 
test  of  all  expenditure  is  the  creation  of  a  surplus  of  satisfactions. 
The  wider  the  range  of  the  participants  in  a  given  expenditure, 
the  greater  the  surplus.  Artistic  and  beautiful,  even  if  expen- 
sive, things  are  indeed  desirable ;  but  to  accomplish  the  greatest 
economic  as  well  as  ethical  good,  their  enjoyment  should  not 
be  monopolized  by  the  few.  In  classic  Greece  the  choicest 
sculptures  and  paintings  were  displayed  in  the  streets  and 
temples ;  and  even  in  modern  times  the  public  galleries  are 
assuming  continually  greater  dimensions.  Where  the  principle 
of  the  public  trusteeship  of  private  wealth  has  permeated  the 
community  we  find,  as  in  a  few  of  the  European  cities,  that  the 
private  galleries  are  so  only  in  name,  and  that  they  are  peri- 
odically, if  not  continuously,  thrown  open  to  the  public. 

Thus  the  economic  view  of  luxury  does  not  really  differ  from 
the  ethical.  From  the  moral  point  of  view  the  self-indulgent 
luxury  of  the  mere  sensualist  is  always  to  be  deprecated :  a 
private  Maecenas  is  relatively  defensible  ;  but  a  public  Maecenas 
is  still  more  admirable.  From  the  economic  point  of  view, 
the  test  is  the  importance  to  society  of  the  luxurious  outlay. 
The  luxury  of  a  mere  faineant  is  always  an  economic  loss ;  the 
luxury  of  the  individual  who  has  honestly  acquired  his  wealth, 
who  has  been  spurred  on  to  activity  by  the  thought  of  the 
ultimate  reward,  and  who  has  succeeded  by  serving  the  com- 
munity is  relatively  defensible;  but  public  luxury  or  the  luxury 
of  the  same  individual  when  he  devotes  his  wealth  to  public 
purposes  is  a  more  distinct  economic  gain,  because  with  the 
same  outlay  of  effort  there  is  now  a  greater  enjoyment,  and 
thus  a  greater  surplus  of  utility.  In  both  public  and  private  ex- 
penditure, however,  great  care  must  be  exercised  not  to  carry 
luxury  to  an  extreme.  Ethically  the  danger  is  that  the  aesthetic 
element  may  be  engulfed  in  sensuality;  economically  the 


584  Poverty  and  Progress.  [§  229 

danger  is  that  the  surplus  or  the  wealth  of  the  community 
may  be  whittled  down  by  increasing  consumption  at  the  ex- 
pense of  production. 

229.  The  Facts  of  Poverty. 

Poverty,  like  luxury,  is  a  matter  of  degree.  Yet  from  one 
point  of  view  we  may  contrast  absolute  with  relative  poverty. 
Absolute  poverty  may  be  defined  as  that  condition  where  the 
income  is  insufficient  for  the  bare  minimum  necessary  to  main- 
tain physical  efficiency.  Relative  poverty,  on  the  other  hand, 
would  be  the  inability  to  maintain  the  standard  of  life  which 
in  civilized  countries  includes  something  more  than  mere 
subsistence. 

Poverty  depends  on  the  relation  of  income  to  the  cost  of 
living.  It  is  therefore  a  matter  of  considerable  importance  to 
determine  on  the  one  hand  the  income  and  on  the  other  the 
extent  and  the  elements  of  the  cost  of  living.  Unfortunately 
the  material  at  our  disposal  is  exceedingly  inadequate,  except 
as  to  the  proportion  of  elements  in  expenditure. 

As  to  these  the  three  fundamental  expenses  are,  in  their 
order  of  importance,  the  expense  for  food,  shelter  and  cloth- 
ing. Several  decades  ago,  the  German  statistician,  Engel, 
made  some  calculations  as  to  the  percentages  of  various  items 
of  expenditure.  More  recently  the  United  States  Bureau  of 
Labor  has  conducted  elaborate  investigations.  Taking  several 
thousands  of  normal  families  classified  according  to  their  in- 
come, the  bureau  found  the  percentage  of  expenditures  in  1901 
to  be  as  shown  in  the  table  on  the  opposite  page.1  The  same 
facts  are  illustrated  graphically  in  the  ch?rt  opposite  page 

584. 

These  results  in  the  main  confirm  those  obtained  by  Dr. 
Engel,  although  there  are  some  discrepancies.  Dr.  Engel's 
propositions  were  as  follows : 

(i)   The  greater  the  income,  the  smaller  the  percentage  of 

1  United  States  Bureau  of  Labor,  Eighteenth  Annual  Report,  Cost  of 
Living  and  Retail  Prices  of  Food,  1904,  p.  101. 


PER  CENT  OF  TOTAL  EXPENDITURE   MADE  FOR  VARIOUS  PURPOSES  IN 
FORMAL  FAMILIES  IN  THE  UNITED  STATES,  1901.  BY  SIZE  OF  INCOME.. 


I 1     LIGHTING 

I 1     SUNDRIES 


From  Bulletin  of  U.S.  Bureau  of  Labor,  No. 


229] 


Facts  of  Poverty. 


585 


outlay  for   subsistence.     This   is   confirmed  by  the  American 
investigation. 

(2)  The  percentage  of  outlay  for  clothing  is  approximately 
the  same,  whatever  the  income.     This  is   not   confirmed   in 
America,  where  the   highest   class  spends  relatively  twice  as 
much  as  the  lowest  class. 

(3)  The  percentage  for  lodging  or  rent  and  for  fuel  and 
lighting  is  approximately  the  same  whatever  the  income.     In 


Classified 
Income. 

Rent. 

Fuel. 

Light- 
ing. 

Food. 

Clothing. 

Sundries. 

Total. 

Under  $200 

16.93 

6.69 

.27 

50-85 

8.68 

I5-58 

IOO 

$200-$300 

18.02 

6.09 

•T3 

47-33 

8.66 

18.77 

IOO 

$3OO-$4OO 

18.61 

5-97 

.14 

48.09 

10.02 

16.09 

IOO 

$400-^500 

18.57 

5-54 

.12 

46.88 

"•39 

16.50 

IOO 

$5oo-$6oo 

18.43 

5-°9 

.12 

46.16 

11.98 

17.22 

IOO 

$6oo-$700 

18.48 

4-65 

.12 

43-48 

12.88 

*9-39 

IOO 

$700-^800 

18.17 

4.14 

.12 

41.44 

13-5° 

21.63 

IOO 

$8oo-$9oo 

17.07 

3-87 

.10 

41-37 

'3-57 

23.02 

IOO 

$9oo-$iooo 

I7-S8 

3-85 

.11 

39-9° 

14-35 

23.21 

IOO 

$ICOO-$IIOO 

17-53 

3-77 

.16 

38.79 

15.06 

23.69 

IOO 

$1100-$  1  200 

16.59 

3-63 

.08 

37.68 

14.89 

26.13 

IOO 

$1200  or  over 

17.40 

385 

.18 

36.45 

15-72 

25.40 

100 

Total 

IOO 

IOO 

IOO 

IOO 

IOO 

IOO 

IOO 

America  this  is  the  case  as  to  rent,  but  not  as  to  fuel,  the 
relative  expenditures  for  which  decrease  as  income  increases, 
perhaps  because  of  better  clothing,  perhaps  because  heating 
of  large  buildings  is  more  economical  than  in  the  case  of 
of  small  houses. 

(4)  As  income  increases  in  amount,  the  percentage  of  out- 
lay for  sundries  becomes  greater.  This  is  confirmed. 

The  American  investigation  also  sought  to  ascertain  the  vari- 
ations in  expenditure  according  to  the  size  of  the  family,  and 
the  result  is  shown  in  the  following  table  of  percentages  for  a 
large  number  of  families  with  an  income  of  from  $600  to 


586 


Poverty  and  Progress. 


[§  229 


ll 

Children. 

ne  Child. 

J  Children. 

e  Children. 

r  Children. 

Children. 

1 
1 

0 

* 

O 

H 

J: 

H 

1 

1 

5 

Rent.  .  . 

20.20 

18.88 

17.88 

J7-93 

17.97 

17.04 

1848 

Fuel  .  .  . 

4-75 

4.69 

4.60 

4-58 

4-79 

4-49 

4.65 

Lighting 

1.18 

1.13 

1.16 

i.  02 

1.09. 

.98 

1.  12 

Clothing 

12.44 

12.81 

12.82 

12.85 

13-45 

13.90 

12.88 

Sundries 

21.30 

20.58 

19-95 

18.69 

15.50 

14.97 

'9-39 

Food    .  . 

40.08 

41.91 

43-59 

44-93 

47-20 

48.62 

43-48 

Total.  . 

IOO 

IOO 

IOO 

IOO 

IOO 

IOO 

IOO 

The  percentages  of  combined  expenditure  for  2,567  families 
selected  for  detailed  investigation  were  as  follows  : 


Food 42-54 

Clothing 14.04 

Rent 12.95 

Fuel 4.19 

Furniture 3.42 

Insurance 2.73 

Sickness  and  Death   .     .     .  2.67 

Liquor 1.62 

Amusements  and  Vacation  1.60 

Mortgages  on  Home  ...  1.58 


Tobacco 1.42 

Labor  and  other  Organiza- 
tion Fees 1.17 

Books  and  Papers       ...       1.09 

Lighting 1.06 

Religious  Purposes    ...         .99 

Taxes 75 

Charity 31 

Other  Purposes      ....       5.87 

Total  loo 


When,  in  lieu  of  taking  percentages,  we  seek  to  ascertain 
the  actual  minimum  of  necessary  expenditure  for  each  pur- 
pose, exact  figures  are  unfortunately  lacking.  The  chief  sci- 
entific results  are  confined  to  the  item  of  food,  and  are  due 
to  the  investigations  of  Professor  Atwater,  published  by  the 
United  States  Department  of  Agriculture.  The  quantity  of 
food  required  is  nowadays  put  in  terms  of  protein  (the  chief 
nutritive  ingredient  of  food)  and  potential  energy  (in  the  form 
of  heat  and  muscular  strength  yielded  by  food).  Potential 
energy  is  usually  expressed  in  heat  units  or  "  calories,"  a 
calorie  being  the  amount  of  heat  needed  to  raise  a  gram  of 
water  one  degree  Centigrade.  On  this  basis  Atwater  has  cal- 


§229]  Cost  of  Living.  587 

culated  that,  according  to  the  muscular  work  accomplished, 
from  100  to  150  grams  of  protein,  yielding  2,700-4,500 
calories,  are  needed  daily.  Men  doing  average  moderate  work 
in  a  temperate  climate  require  3,500  calories,  and  women  eight- 
tenths  of  this  amount.  Detailed  studies  have  also  been  made 
as  to  the  nutritive  and  economic  qualities  of  various  kinds  of 
food  and  the  relation  of  nutrition  to  waste,  careful  attention 
to  which  would  enable  far  better  results  to  be  attained  by  the 
same  outlay  as  at  present.  The  American  workman  especially 
would  gain  much  by  utilizing  these  interesting  results. 

The  principal  application  of  such  considerations  to  the  statis- 
tics of  poverty  has  been  made  by  Rowntree  in  his  remarkable 
study  of  conditions  in  the  English  town  of  York.  According 
to  his  calculations,  the  minimum  necessary  expenditure  for  a 
husband  and  wife  with  three  children  is  2is.  8^/.,  or  about 
$5.25  a  week.  On  this  basis,  and  making  allowance  for  fam- 
ilies of  different  sizes,  he  arrived  at  the  startling  conclusion 
that  almost  twenty-eight  per  cent  of  the  total  population  were 
living  in  poverty,  —  that  is,  in  receipt  of  an  income  insufficient 
for  the  maintenance  of  mere  physical  efficiency.  This  was  a 
striking  and  unexpected  confirmation  of  the  conclusions  by 
Booth  in  his  magnificent  study  of  economic  and  social  condi- 
tions in  London,  that  thirty  per  cent  of  the  London  population 
lived  in  poverty,  below  the  necessary  minimum. 

The  unfortunate  individuals  within  the  poverty  line  are 
wretchedly  housed,  inadequately  clothed  and  underfed.  The 
results  show  themselves  directly  in  the  far  higher  average  death 
rate,  the  greatly  increased  infant  mortality,  and  the  marked 
inferiority  in  height,  weight  and  general  physical  condition. 
Of  the  indirect  influences  on  industrial  efficiency,  on  national 
character  and  on  moral  development  it  is  not  necessary  to 
speak. 

The  conditions  in  London  and  York  may  be  taken  as  fairly 
typical  of  those  in  modern  British  industrial  towns.  Similar 
data  for  the  United  States  are  completely  lacking,  and  nothing 
but  wild  guesses,  devoid  of  scientific  value,  have  been  made. 


588  Poverty  and  Progress.  [§  230 

All  that  we  have  are  more  or  less  fragmentary  statistics  of  ac- 
tual paupers  or  direct  recipients  of  charity,  so  that  an  almost 
virgin  field  discloses  itself  to  the  attention  of  the  statistician 
and  scientific  investigator.  No  one,  however,  who  is  conver- 
sant with  social  conditions  in  our  large  cities  can  doubt  that  if 
in  prosperous  England  over  a  quarter  of  the  urban  population 
is  below  the  poverty  line,  and  another  large  part  scarcely  above 
it,  the  situation  is  not  fundamentally  different  in  the  industrial 
portions  of  America.  It  is  true  that  only  one-third  of  the 
population  live  in  cities  as  against  two-thirds  in  England,  and 
it  is  indisputable  that  the  American  standard  of  life  is  higher. 
But  whether  it  is  thirty  per  cent  or  only  fifteen  per  cent  of  the 
American  urban  population  that  is  submerged  below  the  pov- 
erty line,  the  fact  that  in  our  much  vaunted  modern  civilization 
there  should  be  millions  of  human  beings  who  do  not  possess 
an  income  adequate  for  bare  physical  efficiency  is  sufficiently 
appalling. 

230.  The  Causes  of  Poverty. 

The  causes  of  poverty  are  sometimes  classified  as  individual 
and  social,  or  the  result  of  misconduct  or  of  misfortune.  In 
the  first  category  are  put  such  phenomena  as  intemperance, 
habitual  indolence,  sensuality,  gambling,  ignorance,  shiftless- 
ness  and  improvidence.  This  classification,  however,  is  erro- 
neous for  a  double  reason. 

In  the  first  place,  very  little  permanent  poverty  can  be 
ascribed  to  any  or  all  of  these  so-called  individual  causes 
alone.  They  are  almost  without  exception  found  in  conjunc- 
tion with  some  of  the  so-called  social  causes,  and  it  is  virtually 
impossible  to  segregate  them  and  to  estimate  their  relative  im- 
portance separately  or  as  a  group.  Secondly,  the  distinction 
between  individual  and  social  causes  has  been  much  weakened 
by  natural  science  as  well  as  by  economics  and  sociology. 
Many  of  the  so-called  personal  traits,  for  instance,  have  been 
shown  to  be  the  result  of  heredity,  as  in  the  famous  families 
of  the  Jukes  and  the  Ishmaels,  every  member  of  which  to  the 
number  of  several  hundreds  was  infected  by  the  family  taint. 


§230]  Causes  of  Poverty.  589 

Still  more  important,  however,  is  the  fact  that  the  personal 
and  non-hereditary  characteristics  of  the  individual  are  in 
large  measure  the  result  of  his  environment.  It  is  a  familiar 
fact  that  individual  ethics  are  modified  by  social  ethics ;  it  is 
not  always  appreciated  that  intemperance,  vice,  ignorance  and 
improvidence  are  to  a  very  great  extent  the  consequence  of 
economic  and  social  surroundings.  If  it  be  said  that  intem- 
perance produces  poverty,  it  may  equally  well  be  said  that 
poverty  breeds  intemperance.  What  could  be  more  startling 
than  the  well-authenticated  fact  that  in  many  cities  a  large 
percentage  of  the  unfortunate  women  whom  we  associate  with 
the  term  social  evil  are  reduced  to  ply  their  vocation  by  pov- 
erty alone?  It  is  indeed  true  that  no  matter  how  ideal  the 
general  economic  conditions  may  be,  there  will  always  be 
some  individuals  who  will  sink  to  the  bottom  ;  and  it  is  this 
to  which  the  Bible  no  doubt  refers  when  it  tells  us,  "The  poor 
always  ye  have  with  you."  But  to  suppose,  as  some  of  the 
prosperous  and  cynical  well-to-do  are  wont  to  assume,  that 
this  kind  of  poverty  forms  any  conspicuous  part  of  the  whole 
is  preposterous  in  the  extreme. 

A  better  classification  is  that  into  immediate  and  ultimate 
causes  of  poverty.  In  Rowntree's  careful  investigation  it  was 
found  that  where  the  family  earnings  (all  of  them  expended 
on  the  bare  necessaries  of  life,  and  not  including  other  useful 
or  wasteful  expense)  were  insufficient  for  mere  physical  effi- 
ciency, the  immediate  causes  were  as  follows  :  death  of  chief 
wage-earner,  15.63  per  cent;  illness  or  old  age  of  chief  wage- 
earner,  5.11  percent;  irregularity  of  work,  5.14  percent;  size 
of  family,  22.16  per  cent ;  regular  but  insufficient  wages,  51.96 
per  cent.  So  far  as  the  size  of  the  family  is  concerned,  the 
poverty  line  was  constructed  on  the  basis  of  a  family  of  three 
children.  Had  a  larger  family  been  selected  as  the  average, 
the  numbers  living  in  poverty  would  naturally  have  been  cor- 
respondingly increased.  But  while  a  larger  family  would  in- 
volve a  condition  of  greater  poverty,  it  is  interesting  to  note 
that  this  means  not  continuous  poverty,  but  alternating  periods 


590 


Poverty  and  Progress. 


[§  230 


of  dire  want  and  comparative  comfort.  The  life  of  the  ordi- 
nary unskilled  workman  may  be  divided  into  several  periods. 
During  childhood  he  will  be  apt  to  live  m-  poverty  until  he  as 
well  as  his  brothers  and  sisters  begin  to  contribute  to  the  fam- 
ily income.  He  will  then  be  in  a  position  to  save  and  may 
continue  to  do  so  after  marriage.  When,  however,  more  than 
two  or  three  children  arrive,  he  will  again  fall  below  the  pov- 
erty line  and  remain  there  until  most  of  the  children  are  old 
enough  to  earn  something.  Then  commences  the  second 
period  of  less  acute  privation  which  continues  until  the  chil- 
dren marry  and  leave  him  in  old  age,  when  he  for  the  third 
time  falls  below  the  poverty  line.  This  situation  can  be  illus- 
trated in  the  following  diagram  : 

CHILDREN  MARRY 
yAND  LEAVE  HOMEj 


AGE  0 


From  Rown.tree,  "Poverty,  A  Study  in  Town  Life." 


The  startling  fact,  however,  is  that,  even  with  an  average 
family  and  regular  work,  over  one-half  of  those  living  in 
poverty  at  any  moment  are  reduced  to  that  state  simply  be- 
cause, notwithstanding  the  exercise  of  thrift,  sobriety  and 
care,  the  income  is  inadequate  for  support. 

When  we  ask  what  is  the  ultimate  cause  of  poverty,  it  is  at 
once  obvious  that  no  single  reason  can  be  separated  from  the 
others.  Modern  poverty  is  bound  up  with  the  facts  of  modern 
economic  life,  and  modern  economic  life  is  a  complex  product. 
To  select  any  characteristic  feature  of  the  present  industrial 
system  and  to  single  it  out  as  responsible  for  poverty  is  naive, 


§  23 1]  Relief  of  Poverty.  591 

but  worthless.  The  Malthusian  seizes  upon  redundant  popu-  / 
lation,  the  communist  upon  private  property,  the  socialist  upon 
property  in  means  of  production,  the  single  taxer  upon  prop- 
erty in  land,  the  co-operator  upon  competition,  the  anarchist 
upon  government,  the  anti-optionist  upon  speculation,  the 
currency  reformer  upon  metallic  money,  and  so  on.  They  all 
forget  that  widespread  poverty  has  existed  in  the  absence  of 
each  one  of  these  alleged  causes.  Density  of  population, 
private  property,  competition,  government,  speculation,  and 
money  have  each  been  absent  at  various  stages  of  history 
without  exempting  society  from  the  curse  of  poverty.  Each 
stage  has  had  a  poverty  of  its  own. 

Nothing  is  more  natural,  but  nothing  is  more  fraught  with 
danger,  than  to  cast  a  halo  over  the  past  and  to  make  of  it  a 
golden  age.  The  poverty  of  to-day  is  sad  and  even  heart- 
rending, but  to  the  student  of  economic  history  it  is  clear  that  in 
the  older  industrial  countries  at  least,  where  alone  a  fair  com- 
parison can  be  made,  the  poverty  of  to-day  is  less  than  it  was 
a  century  ago,  and  far  different  from  what  it  was  in  former 
ages.  Even  the  socialists  are  now  abandoning  their  contention 
as  to  the  gradual  pauperization  of  the  mass  of  society,  and  are 
restricting  themselves  to  the  complaint  that  the  workman  is  not 
securing  a  fair  share  of  the  undoubted  increase  of  wealth.  More- 
over, at  the  present  time  there  is  bitter  poverty  in  India,  a 
country  without  the  modern  industrial  system  ;  and  still  more 
acute  destitution  among  savages  who  are  ignorant  of  property  in 
land.  The  causes  of  poverty  are  as  complex  as  the  causes  of 
civilization  and  the  growth-  of  wealth  itself. 

231.  Relief  of  Poverty. 

All  remedies  for  poverty  fall  into  one  of  two  classes,  —  the 
palliative  and  the  curative,  —  the  endeavor  to  relieve  poverty 
and  the  attempt  to  prevent  poverty.  The  distinguishing  feature 
of  modern  life  is  the  growth  of  a  public  sentiment  which  seeks 
to  cope  with  the  evils  of  poverty  from  both  points  of  view. 

The  relief  of  poverty  has  taken  the  forms  of  private  and 


592  Poverty  and  Progress.  [§  231 

public  relief.  Private  charity,  again,  has  been  either  individual 
or  institutional.  We  thus  have  the  three  classes  of  individual 
relief,  private  institutional  relief  and  public  relief. 

1 i )  Individual  charity,  while  incontrovertibly  of  great  weight 
in  special  cases,  is  often  likely  to  be  of  ethical  importance  to 
the  bestower  rather  than  of  economic  benefit  to  the  recipient. 
Experience  has  shown  that  indiscriminate  personal  charity  is 
frequently  ill-advised,  because  it  is  the  result  only  of  the  heart 
rather  than  of  heart  and  head  combined.    The  consequence  is 
that  it  is  just  as  likely  to  perpetuate  as  to  relieve  beggary  and 
pauperism.     The  realization  of  this  fact  has  led  to  the  replace- 
ment, or  at  all  events  to  the  supplementing,  of  personal  by 
institutional  relief. 

(2)  Institutional  private  relief  is  exemplified  by  the  char- 
itable agencies  like  benevolent  societies,  relief  and  aid  societies, 
associations  for  improving  the  condition  of  the  poor,  fatherless 
and  widows'  societies,  and  societies  for  promoting  frugality  and 
repressing  mendicancy.    Above  all,  however,  we  must  signalize 
the  charity  organization  societies  which  have  been  rapidly  de- 
veloping during  the  last  half-century.     These  are  endeavoring 
to  substitute  scientific  principle  for  hap-hazard   action,   and 
have  done  not  a  little  to  direct  the  stream  of  generosity  into 
the  right  channels.     Pauperism,  however,  either  brings  in  its 
train  or  aggravates  many  other  distressing  evils  such  as  the 
various  forms  of  disease,  unsanitary  homes,  dependent  chil- 
dren, and  liability  to  economic  and  legal  exploitation.     Num- 
berless,  therefore,   are    the    modern    institutions   like   private 
hospitals,    dispensaries,    sanatoria,    anti-tuberculosis    leagues, 
improved    dwellings    and    model    lodging-house    companies, 
orphan  asylums,  creches,  kindergartens,  juvenile  homes,  fresh 
air  funds,  retreats   for  the   aged,   the   convalescent    and    the 
incurable,    provident    loan    societies,    employment    agencies, 
wood-yards  and  laundries,  industrial  colonies,  legal  aid  socie- 
ties, peoples'  palaces  and  the  like.     Bewildering  in  their  com- 
plexity, the  proper  management  of  these  philanthropic  agencies 
has  become  a  distinct  profession  and  the  subject  of  a  separate 
discipline,  with  a  stupendous  literature  of  its  own. 


§  231]  Poor  Laws.  593 

In  former  times  institutional  philanthropy  was  to  a  large 
extent  religious  in  character.  All  the  great  religions  of  the 
world  have  inculcated  the  virtue  of  benevolence,  and  not  the 
least  contribution  of  Christianity  consisted  in  the  new  spirit  of 
universal  brotherhood  and  charity  which  it  infused  into  the 
pagan  European  world.  During  the  major  portion  of  the 
middle  ages,  in  fact,  the  charities  of  the  church  were  virtually 
the  sole  embodiments  of  organized  philanthropic  activity.  It 
was  only  after  the  Reformation,  when  the  property  of  the  church 
and  of  many  of  the  religious  orders  was  "  secularized,"  that  the 
need  of  some  form  of  public  relief  was  recognized. 

(3)  The  most  important  illustration  of  public  relief  is  that 
known  as  the  Poor  Law  System.  In  England,  after  the  con- 
fiscation of  the  guilds  and  chantries  during  the  sixteenth  cen- 
tury, the  bishops  were  admonished  to  exhort  their  parishioners 
to  more  liberal  gifts  for  the  poor.  As  these  exhortations  grad- 
ually lost  their  efficacy,  it  was  finally  provided  that  in  case  of 
contumacy  the  justices  of  the  peace  might  order  an  assessment. 
Thus  did  the  voluntary  contributions  gradually  change  into 
compulsory  payments,  —  a  process  which  may  be  observed  in 
the  history  of  all  taxation.  In  1601  a  general  assessment  was 
levied  for  the  support  of  the  able-bodied  and  impotent  poor. 
In  1662  the  settlement  act  was  passed,  designed  on  the  one 
hand  to  increase  the  facility  of  relief,  but  on  the  other  to  limit 
it  strictly  to  native  inhabitants  of  the  locality.  The  act  of  1722 
authorized  the  building  of  workhouses,  and  the  withholding  of 
relief  from  those  that  refused  to  enter.  Gilbert's  act  of  1782 
directed  the  local  authorities  to  find  for  the  unemployed  poor 
work  suitable  to  their  requirements  and  in  the  proximity  of 
their  homes.  The  system  reached  its  climax  in  the  act  of 
1796,  when  Parliament  followed  a  similar  resolution  of  some 
justices  of  the  peace  who  had  assembled  at  Speenhamland  in 
the  preceding  year  and  authorized  outdoor  relief  for  the 
necessitous  as  a  substitute  for  the  now  discredited  workhouse 
test. 

It  was  at  one  time  the  custom  to  ascribe  a  disproportionate 


594  Poverty  and  Progress.  [§  232 

influence  to  the  poor  law.  The  English  system  was  undeniably 
a  direct  premium  on  improvident  marriage  and  lack  of  frugal- 
ity. But  the  oft  repeated  assertion  that  it  impoverished  the 
comfortable  and  perpetuated  the  miserable  is  clearly  an  ex- 
aggeration. The  situation  at  the  close  of  the  eighteenth  and 
beginning  of  the  nineteenth  centuries  was  indeed  deplorable  ; 
but,  as  we  know,  it  was  very  largely  the  result  of  the  abuses 
connected  with  the  transition  from  the  domestic  to  the  factory 
system.  The  poor  law  played  its  part,  but  after  all  a  relatively 
inconspicuous  part,  in  maintaining  the  degradation  of  the 
working  classes.  In  the  same  way  the  great  reform  of  the  poor 
law  in  1834,  by  which  outdoor  relief  was  abolished,  was  only 
one  of  the  many  ameliorative  movements  which  revolutionized 
the  condition  of  the  laborers  in  the  second  quarter  of  the 
century,  such  as  the  abolition  of  the  conspiracy  acts,  the 
passage  of  the  factory  laws,  the  repeal  of  the  corn  laws, 
the  reform  of  taxation,  and  the  growth  of  democracy.  The 
old  poor  law  did  not  create  English  poverty,  and  the  new 
poor  law  did  not  abolish  it. 

In  the  United  States,  where  pauperism  has  been  for  obvious 
reasons  less  acute,  the  two  salient  features  of  the  poor-law  sys- 
tems have  been  the  almshouse  and  outdoor  relief.  Public  out- 
door relief,  however,  has  been  substantially  abolished  in  some 
of  the  larger  Eastern  cities,  like  New  York,  Philadelphia,  Balti- 
more and  Washington,  with  distinctly  good  results.  A  consid- 
eration of  the  relative  merits  of  public  and  private  relief, 
which  is  becoming  the  subject  of  warm  discussion  in  many 
parts  of  the  United  States,  would  however  lead  us  too  far 
astray ;  for  the  controlling  considerations  are  not  primarily 
economic  in  character. 


232.   Prevention  of  Poverty. 

We  have  seen  that  there  is  no  single  cause  of  poverty ;  there 

I      can  accordingly  be  no  single  preventive  of  poverty.    The  nai've 

and  simple  remedies  that  are  commonly  advanced  may  be  re- 


§  232]  Prevention  of  Poverty.  595 

duced  in  their  practical  operation  to  two,  —  a  diminution  of 
population  and  a  diminution  of  wealth. 

After  the  discussion  in  Chapter  IV.  the  suggestion  that  pov- 
erty can  be  abolished  by  checking  population  scarcely  needs 
any  further  comment.  Human  beings  are  producers  as  well 
as  consumers,  and  under  proper  conditions  an  increase  of 
population  may  be  entirely  compatible  with  an  increase  of 
general  wealth.  Nothing  is  more  indisputable  than  that  num- 
bers have  increased  and  relative  poverty  has  decreased  in 
many  modern  countries. 

(^The  diminution  of  wealth,  on  the  other  hand,  is  in  itself  , 
never  advanced  as  a  remedy,  for  that  would  be  too  obviously  | 
absurd.  But  all  the  other  naive  remedies  for  poverty  are  prac- 
tically tantamount  to  this.  I  To  the  attentive  reader  of  the  pre- 
ceding chapters  it  should  be  abundantly  clear  that/private 
property  and  individual  initiative  have  been  the  motor  forces 
of  the  accumulation  of  wealth  and  the  real  progress  of  humanity./ 
Anything  therefore  which  seriously  saps  these  foundations  neces- 
sarily undermines  not  only  the  whole  structure  of  industrial 
society  but  the  edifice  of  civilization  itself.  Anarchism  would 
abolish  government,  but  in  so  doing  would  rob  society  of  the 
fundamental  protection  which  enables  it  to  exist  in  peace. 
Communism  would  level  distinctions  of  wealth,  but  in  eliminat- 
ing private  property  would  destroy  progress.  {The  restriction  of 
large  fortunes  by  taxation,  by  direct  prohibition  or  by  limitation 
of  bequest  would  seriously  impair  the  spirit  of  enterprise./  So- 
cialism, which  would  abolish  private  control  of  production, 
would  in  the  present  condition  of  the  human  race  necessarily 
diminish  production.  Socialism  is  virtually  co-operation  ;  and 
the  true  co-operative  spirit  is  wofully  lacking  in  the  mass  of 
mankind.i  There  are  indeed  conspicuous  examples  of  wealthy 
socialists,  but  they  have  been  for  the  most  part  men  of  lofty 
idealism  who  would  have  played  an  equally  prominent  part  in 
the  reform  rather  than  the  reconstruction  of  modern  industry. 
If  the  rank  and  file  of  men  were  ethically  as  advanced  as  are 
many  of  the  socialist  leaders,  there  would  be  no  need  of  reform. 


596  Poverty  and  Progress.  [§  232 

Socialism  assumes  that  mankind  is  ready  for  the  self-abnegation 
implied  in  the  very  idea  of  the  public  and  co-operative  activity 
which  is  to  include  the  whole  of  productive  enterprise.  History 
and  psychology  alike  teach  us  that  this  grossly  underrates  the 
importance  of  the  economic  motive.  When  the  world  is  ready 
for  socialism,  socialism  will  be  unnecessary.  In  the  mean  time 
any  serious  encroachment  of  socialism  would  inevitably  bring 
with  it  a  slackening  in  the  pace  of  accumulation ;  and  in  the 
long  run  a  diminution  of  wealth  cannot  mean  a  diminution  of 
poverty. 

To  say,  however,  that  poverty  has  always  existed  is  no  reason 
for  believing  that  it  should  continue  forever  to  exist.  Absolute 
equality  of  conditions  is  indeed  an  iridescent  dream,  for  it  runs 
counter  to  the  inequality  or  differentiation  which  is  the  law  of 
all  life  and  the  explanation  of  all  change.  But  if  the  preceding 
discussions  in  this  volume  have  emphasized  any  one  point  it 
is  the  fact  of  the  progressive  intermingling  of  the  individual  and 
social  points  of  view,  —  the  interpenetration,  as  it  were,  of  the 
individual  by  the  claims  of  society,  and  on  the  other  hand  the 
infusion  into  the  collective  activity  of  some  of  the  surplus  energy 
which  must  always  continue  to  find  its  tap-root  in  the  efforts 
of  the  individual.  Translated  into  economic  terms,  this  means 
that  the  modern  industrial  system  is  slowly  producing  not  only 
political  democracy  but  economic  democracy,  and  that  eco- 
nomic democracy  is  incompatible  with  permanent  and  wide- 
spread poverty. 

This  does  not  imply  that  economic  forces  alone  and  directly 
are  creating  a  millennium,  or  that  the  political  ideal  is  laisser- 
faire.  Government  and  the  public  sentiment  behind  it  are 
in  a  sense  the  outgrowth  of  the  economic  situation ;  but,  as 
we  have  learned,  they  are  also  potent  factors  in  modifying  the 
situation.  Economic,  political  and  ethical  forces  are  conspiring 
to  bring  about  progress  by  raising  the  social  level.  In  ordinary 
business  life  this  means  the  gradual  but  clearly  discernible 
elevation  of  the  standard  of  commercial  morality.  So  far  as 
poverty  is  concerned  it  means  the  lifting  of  the  standard  of  life 


§  233]          Future  of  Economic  Life.  597 

of  the  laborer  and  the  setting,  in  ideal  at  least,  of  an  irreducible 
minimum,  below  which  national  production  is  not  worth  having. 
Practically  this  process  assumes  the  varied  forms  of  trades-union 
activity,  of  education  of  the  unskilled,  of  factory  legislation,  of 
labor  insurance,  of  employers'  liability,  of  improved  housing, 
of  trade  agreements,  of  control  of  monopoly  and  of  all  the  other 
modern  agencies  of  social  reform.  The  process  is  a  slow  one, 
because  it  is  an  arduous  task  to  make  the  successful  and  self- 
satisfied  business  man  realize  that  the  true  ultimate  interests 
of  his  class  are  associated  with  the  increased  consumption  that 
can  come  only  from  the  higher  standard  of  life  of  the  mass  of 
the  producers.  It  is  in  the  last  instance  public  opinion  alone 
which  in  a  democracy  can  protect  the  well-intentioned  and 
long-sighted  employer  from  the  unfair  competition  of  his  un- 
scrupulous and  selfish  rivals. 

The  way,  therefore,  to  have  progress  without  poverty  is  not 
to  level  down  but  to  level  up ;  to  do  nothing  which  will  pre- 
vent the  capable,  the  resourceful  and  the  daring  from  exerting 
their  skill  and  inventive  ingenuity ;  but,  on  the  other  hand,  to 
keep  open  the  door  of  opportunity  for  all  and  to  throw  about 
the  mass  of  the  less  fortunate  and  the  less  gifted  the  pro- 
tecting mantle  of  a  public  sentiment  which  will  be  intolerant 
of  injustice,  and  which  will  insist  upon  the  creation  of  condi- 
tions that  insure  to  every  worthy  human  being  at  least  the 
possibility  of  a  worthy  human  existence. 

233.  The  Future  of  Economic  Life. 

We  come  finally  to  the  questions  which  at  the  close  of  such 
a  study  as  this  inevitably  force  themselves  upon  us :  Whither 
are  we  tending  ?  What  lessons  have  an  economic  interpretation 
of  the  past  and  of  the  present  to  teach  us  in  our  guidance  for 
the  future  ?  What  are  the  forces  that  are  making  for  progress 
or  retrogression? 

There  is  no  blinking  the  fact  that  many  give  a  pessimistic 
answer  to  these  queries  :  they  call  attention  to  the  increase  of 
luxury  and  materialism  j  they  look  with  suspicion  upon  what 


598  Poverty  and  Progress.  [§  233 

they  term  the  growing  plutocracy  and  the  new  feudalism ; 
they  point  to  the  warning  example  of  the  oriental  monarchies, 
of  classic  Greece  and  Rome,  and  tell  us  that  in  our  case,  too, 
the  period  of  prosperity  which  is  now  upon  us  will  be  followed 
by  one  of  decay  and  final  dissolution.  What  has  been  will  be : 
there  is  nothing  new  in  human  affairs,. 

Yet  a  discriminating  study  of  the  considerations  set  forth  in 
this  volume  should  preserve  us  from  so  gloomy  and  despond- 
ent an  attitude.  The  three  factors  of  importance  to  which  all 
that  has  preceded  may  be  reduced  are  :  the  growth  of  indus- 
trial capital,  the  internationalism  of  science,  and  the  emer- 
gence of  the  democratic  ideal. 

(i)  In  ancient  Rome,  as  in  feudal  Europe  and  colonial 
America,  the  conditions  of  landholding  played  a  dominant 
role.  The  control  of  the  trade  routes  was  the  chief  factor  in 
the  rise  and  fall  of  the  oriental  monarchies,  of  the  Greek  city 
states,  of  the  Italian  and  German  towns,  of  Portugal  and 
Spain.  The  distinguishing  mark  of  modern  times,  on  the 
other  hand,  is  the  existence  of  industrial  capital.  We  speak 
glibly  of  the  recent  progress  of  science,  but  few  realize  the 
true  import  of  this  growing  subjection  of  nature  to  man,  and 
of  the  revolutionary  character  of  this  harnessing  of  the  powers 
of  the  universe  to  the  yoke  of  the  human  intellect.  For  one 
thing,  it  has  made  possible  an  almost  limitless  increase  in 
production.  Landed  capital,  under  the  unscientific  methods 
of  the  past,  was  able  to  go  so  far  and  no  farther.  The  advent 
of  commercial  capital  indeed  increased  prosperity,  and  to  the 
extent  that  exchange  is  really  a  phase  of  production,  aug- 
mented the  productive  power  of  the  world.  But  here,  again, 
its  efficacy  was  confined  within  narrow  bounds.  Creating  new 
values  simply  by  the  bartering  of  existing  values,  the  pyramid 
of  wealth  rested  on  the  basis  of  the  actual  production  within 
each  community,  and  could  not  be  piled  up  beyond  a  certain 
height.  But  with  modern  industrial  capital  and  the  snatching 
from  nature  of  her  intimate  secrets,  the  utilization  of  natural 
resources  within  each  country  has  become  almost  boundless, 


§  233]  The  Economic  Ideal.  599 

and  provides  an  ever-broadening  base  for  the  benefits  of  trade 
and  commerce. 

It  is  for  this  reason  alone  that  the  history  of  the  world  in 
the  future  is  to  be  so  different  from  the  past.  In  former  times, 
after  a  certain  point  had  been  reached  in  agriculture  and  com- 
merce, human  ingenuity  was  powerless  to  do  more  than  divide 
existing  wealth ;  and  with  this  fixed  limit  to  production,  it  is 
no  wonder  that  each  civilization  in  turn  should  have  attempted 
to  secure  the  prize  for  itself.  Hence  the  rise,  the  glory  and 
the  decline  of  nations.  In  future,  however,  in  lieu  of  dividing 
existing  wealth,  each  nation  which  lives  up  to  its  opportunities 
will  be  able  to  create  new  wealth.  Important  as  will  continue 
to  be  the  land  question  and  the  trade  relations,  the  secret  of 
ultimate  success  is  to  be  sought  in  the  fundamental  conditions 
of  industrial  enterprise  at  home ;  and  with  the  growth  and 
control  of  industrial  capital  there  need  be  no  limit  to  the  con- 
tinuous march  of  wealth  and  progress. 

(2)  Science  is  not  only  boundless  in  its  possibilities,  but  im- 
partial in  its  activities.  Science  transcends  all  national  lines. 
Never  again  will  a  country  be  able  to  achieve  or  to  retain  a 
monopoly  of  industrial  advantages.  For  the  time  being,  in- 
deed, climatic  conditions  or  racial  characteristics  may  give 
one  nation  a  temporary  preponderance  in  some  particular  cat- 
egory of  production ;  but  with  the  overwhelming  importance 
of  new  industrial  methods,  applicable  impartially  to  all  natural 
forces,  the  advantage  cannot  be  permanently  retained. 

We  are  accustomed  to  speak  of  the  changes  brought  about 
by  the  alteration  in  the  media  of  transportation  and  the  growth 
of  the  world  market ;  we  do  not  yet  realize  the  full  implica- 
tions of  the  industrial  revolution.  Rightly  conceived,  it  means 
the  coming  internationalism  of  mighty  empires  in  friendly  com- 
petition with  each  other,  not  for  the  division  of  what  exists, 
but  for  the  utilization  of  what  can  be  made  to  exist.  For  the 
immediate  future,  indeed,  while  nations  are  still  in  unequally 
developed  stages  of  industrial  growth,  and  while  there  remain 
extended  markets  not  yet  on  the  highroad  to  industrial  pre- 


600  Poverty  of  Progress.  [§  233 

dominance,  there  will  still  be  some  room  for  the  nationalism 
of  the  old  type  with  its  protective  features  and  its  commercial 
rivalries.  In  these  contests  we  must  undoubtedly  take  our 
part.  But  with  every  decade's  progress  in  scie'nce  the  con- 
ditions will  change,  and  the  old  nationalism  of  exclusiveness 
will  melt  into  the  new  cosmopolitanism  based  upon  the  con- 
tinual progress  of  each  great  and  economically  homogeneous 
community. 

(3)  The  final  point  of  difference  —  the  flower  and  fruit  of 
all  its  forerunners  —  is  the  existence  of  the  democratic  ideal. 
We  point,  indeed,  with  complacency  to  the  advance  made  by 
the  skilled  members  of  the  working  class,  but  to  those  who 
realize  the  essential  conditions  of  successful  democracy,  where 
the  mass  of  citizens  are  necessarily  the  laborers,  the  ideal  to  be 
attained  advances  still  more  rapidly  than  the  actual  progress. 
The  brutish,  lethargic  peasant  of  the  old  world  is,  perhaps, 
content  with  his  crust  and  his  misery.  The  free  citizen  of  the 
modern  industrial  state  wants,  and  wants  justly,  to  participate 
in  the  spiritual  as  well  as  the  material  benefits  of  modern  civil- 
ization. With  every  advance  in  his  economic  position,  due  to 
the  interplay  of  modern  industrial  forces,  new  vistas  of  possi- 
bilities disclose  themselves,  new  sources  of  legitimate  satisfac- 
tion make  their  appearance.  (The  social  unrest  of  to-day, 
with  all  its  disquieting  and  regrettable  incidents,  is  on  the 
— ^/  whole  a  salutary  symptom.^  It  is  but  the  labor  pains  in  the 
birth  of  the  new  industrial  order  which  has  been  in  the  mak- 
ing for  the  past  few  generations,  and  of  which  the  faint  outlines 
are  even  now  discernible. 

A,  This  new  industrial  order  depends,  however,  on  the  emer- 
gence of  a  healthy  public  opinion.  In  antiquity  political  and 
social  opinion  was  a  class  opinion.  In  the  middle  ages  the 
incoherent  public  opinion  was  intolerant  to  competition.  In 
modern  times  the  progress  of  economic  thought  and  the  pres- 
sure of  economic  fact  in  uplifting  the  hitherto  submerged  classes 
of  the  community  are  generating  a  public  opinion  which  frankly 
^4  recognizes  the  benefits  of  a  healthy  competition,  but  which 


§  234]  Role  of  Economics.  60 1 

insists  more  and  more  on  an  effective  social  control  of  compe-  Z^ 
tition  to  the  end  that  it  be  elevated  and  purified. 

A  study  of  the  economic  forces  now  at  work  therefore 
justifies  a  reasonable  hopefulness.  The  productive  powers  of 
society  are  augmenting  at  such  a  prodigious  rate  that  we  need 
no  longer  apprehend  a  decay  of  general  prosperity  or  of  national 
power.  There  is  to  be  no  further  irruption  of  the  barbarian,  be- 
cause there  will  soon  be  no  more  barbarians.  There  is  to  be 
no  swinging  back  of  the  pendulum  of  civilization,  because  under 
the  influence  of  the  new  economic  forces  only  those  nations 
can  succeed  that  understand  how  to  utilize  industrial  capital ; 
and  this  comprehension  implies  an  ever-ascending  stage  of 
civilization.  There  is  to  be  no  domination  of  each  people  in 
turn  over  all  the  others,  because  of  the  internationalism  of 
science  and  the  impartial  territorial  diffusion  of  industrial 
agencies.  And  within  each  nation,  while  the  rich  are  un-  £-" 
doubtedly  getting  richer  and  while  poverty  still  stalks  abroad, 
the  poor  are  not  getting  poorer.  The  creation  of  a  more\ 
equable,  because  a  more  complete,  competition  through  the 
development  of  the  system  of  collective  bargaining  and  the 
more  adequate  supervision  of  monopoly ;  the  recognition  on 
the  part  of  the  public  that  lasting  prosperity  depends  not  only 
on  the  conservation  and  free  play  of  capital,  but  also  on  the 
gradual  elevation  of  the  laborer  from  a  cheap  man  to  a  dear 
man ;  the  coming  social  control  of  competition  itself  in  the 
interests  of  a  more  enlightened  and  hence  really  freer  rivalry,J 
—  all  these  will  inevitably  tend  to  secure  to  each  class  in  the 
community  its  proper  share  in  the  national  dividend. 

234.  The  R61e  of  Economics. 

Economics,  then,  has  a  progressively  important  role  to  play 
in  the  future.  We  thus  come  at  the  end  to  the  position  from 
which  we  started  out.  With  the  commanding  significance  of 
the  economic  life  in  its  influence  on  social  progress,  econom- 
ics, in  pointing  out  exactly  what  is,  must  necessarily  concern 
itself  with  what  ought  to  be.  If  the  economic  student  is  the 


602  Poverty  and  Progress.  [§  234 

X  real  philosopher  of  social  life,  he  will  take  a  more  notable  part 
in  future  speculation  and  future  legislation.  The  various  social 
classes,  by  reason  of  their  very  being,  see  only  the  particular, 
not  the  general  interests.  The  farmer  understands  the  work- 
ings of  Wall  Street,  and  the  factory  hand  comprehends  the 
condition  of  the  world  market,  as  little  as  the  capitalist  real- 
izes the  true  ideals  of  the  laborer.  To  let  any  one  class  act  as 
spokesman  for  the  other  is  pregnant  with  danger.  The  eco- 
nomic student,  if  he  is  worthy  of  his-  calling,  will  proceed  with- 
out fear  or  favor ;  he  will  be  tabooed  as  a  socialist  by  some, 
as  a  minion  of  capital  by  others,  as  a  dreamer  by  more.  But 
if  he  preserves  his  clearness  of  vision,  his  openness  of  mind, 
his  devotion  to  truth  and  his  sanity  of  judgment,  the  deference 
paid  to  his  views,  which  is  even  now  beginning  to  be  apparent, 
will  become  more  and  more  pronounced.  The  influence  of 
economic  conditions  on  economic  theory  has  been,  let  us 
hope,  abundantly  demonstrated  ;  but  the  reciprocal  influence 
of  economic  thought  on  actual  conditions  is  in  danger  of  being 
overlooked.  As  the  science  itself  becomes  more  and  more 
complete,  it  will  be  in  a  better  position  to  apprehend  and  to 
explain  the  real  content  of  existing  conditions  and  the  true 
method  of  making  the  actual  conform  to  the  ideal.  Economics, 
which  is  to-day  only  in  its  infancy,  and  which  is  of  all  disci- 
plines perhaps  the  most  difficult  and  the  most  complicated,  is 
indeed  interlaced  with  and  founded  upon  the  actual  condi- 
tions of  the  time ;  but  like  natural  science  the  economics  of 
the  future  will  enable  us  to  comprehend  the  living  forces  at 
work,  and  by  so  doing  will  put  us  in  a  position  to  control  them 
and  to  mould  them  to  ever  higher  uses.  Economics  is  there- 
fore both  the  creature  and  the  creator.  It  is  the  creature  of 
the  past ;  it  is  the  creator  of  the  future.  Correctly  conceived, 
adequately  outlined,  fearlessly  developed,  it  is  the  prop  of  ethi- 
cal upbuilding,  it  is  the  basis  of  social  progress. 


INDEX. 


INDEX. 


A  BSTINENCE,  320. 

Agricultural   improvements,   influ- 
ence on  rent,  382,  383. 

Agriculture,  extensive  and  intensive, 
311 ;  in  the  United  States,  311,  312; 
large  scale,  334-3375  machinery  in, 
335>  336'  migratory,  309;  possibil- 
ities of,  43,  44;  stages  in,  309-312; 
surface  tillage,  310;  three  field  sys- 
tem, 311 ;  two  field  system,  310. 

American  system,  101. 

Anarchism,  560,  561;  as  a  remedy  for 
poverty,  595. 

Annuities,  550,  551;  tontine,  551. 

Anti-trust  laws,  349,  542. 

Apprenticeship,  trade  union  restriction 
of,  167,  437,  438. 

Arbitration,  445-447. 

Aristotle,  7. 

jgALANCE  of  bargain,  116. 

Balance   of   trade,    116,    117,   493, 
494,  496-498,  5°5- 

Banking,  472-476,  566;  need  of  super- 
vision of,  475,  476;  legal  reserve  in 
the  United  States,  475. 

Banking  principle,  482,  483. 

Bank  notes,  474;  bond  deposit  system, 
484,  485;  regulation  of,  482-487; 
safety  fund  system,  485 ;  Suffolk 
system,  485. 

Banks,  co-operative,  444. 

Bequest,  136,  137. 

Billeter,  G  ,  404. 

Bills  of  exchange,  497-500. 

Bimetallism,  461-466. 

Birth  rate,  57. 

Blacklist,  440. 

Bland-Allison  Act,  464,  465. 

Bodin,  116. 

Bonds,  kinds  of,  326,  327. 

Bounties,  576-578. 

Boycott,  440,  441. 


Brussels  Convention,  571. 
Biicher,  C.,  89. 

Building  and  loan  associations,  444. 
By-products,  252. 

QAIRNES,  J.  E.,  158,492. 

Call  loans,  interest  on,  395. 
Capital,  ch.  xxi,  313-328. 
Capital,  1 6,  209,  280 ;  accumulation 
limited  by  marginal  forbearance,  407, 
408;  active  and  passive,  314,  315; 
agricultural,  315  ;  as  basis  of  round- 
about production,  316-318  ;  as  capi- 
talized income,  17,  402  ;  as  equivalent 
to  the  available  stock  of  wealth,  321 ; 
as  foundation  of  culture,  319,  320 ;  as 
a  homogeneous  fund,  393-395;  as 
oiiginating  in  saving,  319,  320  ;  as 
synchronizing  labor  and  its  reward, 
318;  commercial,  315  ;  financial,  315, 
316;  fixed  and  circulating,  314,  315; 
function  of,  18,  316-318;  fund  of, 
215-219  ;  industrial,  315,  316;  in 
Greece  and  Rome,  110-112  ;  in- 
vestment of,  324-328;  kinds  of,  313- 
316  ;  origin  of  term,  17;  productiv- 
ity of,  316-318;  relation  to  income, 
15-19;  traditional  definition,  17. 

Capitalization  of  Value,  The,  ch.  xiv, 
204-221. 

Capitalization,    266,   267 ;    relation    to 
crises,  489,  490. 

Capital  value,  209-211. 

Carey,  H.  C.,  277,  505,  509. 

Cartel,  339. 

Cassel,  G.,  407. 

Character  and  Factors  of  Production, 
ch.  xviii,  275-284. 

Charity,  592,  593. 

Child  labor,  284;   prohibition  of,  430, 

43*  • 

Civic  Federation,  National,  446. 
Civil  war,  economic  causes  of,  102. 


605 


6o6 


Index. 


Clan,  85. 

Clark,  J.  B.,  124,  185. 
Clark's  law,  185-188. 
Class  competition,  143,  144. 
Class  conflict,  144. 

Classification,  railway,  532-535  ;  as  in- 
fluenced by  value  of  service  principle, 

532>  533- 

Clearing  house.  474. 

Climate,  influence  on  character,  38,  39. 

Colonies,  59;  forced  labor  in,  161. 

Combination,  advantages  of,  341 ;  causes 
of,  341;  effects  of,  344-347?  extent, 
342;  growth  of,  340-344;  influence 
of  railway  charges  on,  341,  342;  in- 
fluence of  tariff  on,  341,  342;  limits 

°f,  347-35°- 

Commodity,  9,  10. 

Communism,  64,  136,  560  ;  as  a  remedy 
for  poverty,  595;  attitude  toward 
rent,  388. 

Competition,  ch.  x,  139-153. 

Competition,  229  ;  as  annihilating  prof- 
its, 356,  357;  as  cause  of  railway  dis- 
crimination, 527,  528;  cut-throat,  146, 
147;  fair,  147, 148;  in  railway  business, 
347,  348,  526-528 ;  limits  of,  147- 
150  ;  of  classes,  143,  144;  of  factors  of 
production,  401,  402 ;  of  races,  144, 
145 ;  potential,  as  limiting  monopoly 
price,  368;  rise  of,  116;  relation  to 
progress,  141,  143. 

Concentration  of  industry,  329-350; 
distinguished  from  monopoly,  330. 

Conciliation,  445-447. 

Consolidation,  331,  337-340  ;  extent  of, 
342. 

Constant  returns,  251. 

Consumption,  minimum  for  efficiency, 
586,  587,  589,  590;  relation  to  pro- 
duction, 276,  277,  283,  287. 

Convertible  husbandry,  311. 

Co-operation,  140,  151,  152,  444,  445. 

Copyrights,  152,  153. 

Corner,  360,  361. 

Corporation,  96-98,  325-327;   holding, 

339,  34°- 

Cosmopolitanism,  118,  513,  514. 

Cost,  as  equivalent  to  pain,  191;  as  a 
measure  of  value,  199;  constant,  249- 
251;  differential,  245-247;  increasing 


and  diminishing,  250,  251;  joint, 
251-253,  530;  law  of  maximum  or 
marginal,  246,  247  ;  law  of  minimum, 
247-249 ;  marginal,  as  determining 
normal  price,  246,  247;  marginal, 
equivalence  with  marginal  utility, 
192;  marginal,  relation  to  price,  378; 
meaning  of,  189-192;  minimum,  as 
determining  normal  value,  247-249; 
of  money,  458;  relation  to  value, 
190,  419;  social,  243,  244;  social  and 
individual,  192,  193;  social,  equiva- 
lence with  social  utility,  197,  198. 

Cost  of  production,  243;  as  influenced 
by  rate  of  wages,  287,  288 ;  relation 
to  normal  price,  253,  254;  relation  to 
value,  198,  199,  263,  264. 

Cost  of  reproduction,  244. 

Costs,  law  of  comparative,  225,  226. 

Cournot,  A.  A.,  29. 

Credit,  ch.  xxix,  469-490. 

Credit,  influence  on  prices,  476-478; 
nature  of,  469-472 :  relation  to  crises, 
487-490. 

Crises,  487,  488;  relation  to  credit, 
487-490. 

Cropping  system,  385,  386. 

Currency,  bank.  479-487;  paper,  in  the 
United  States,  478-481. 

Currency  principle,  482,  483. 

Custom,  150,  151. 

Customs  duties,  502. 


T)EATH  rate,  57-59- 

Demand,  222,  223;  elasticity  of, 
240-242;  joint,  241,  242;  normal, 
239-242. 

Demand  and   supply,   237;   as  an  ex- 
planation of  wages,  414,  415. 

Democracy,  significance  of,  600,  601. 

Demolins,  E.,  41. 

Deposit,  473-475- 

Depreciation,  law  of,  206-209. 

Determination  of  Market  Value,  ch.  xv, 
222-238. 

Determination  of  Normal  Value,  The, 
ch.  xvi,  239-259. 

Development  of   Economic   Thought, 
ch.  viii,  109-124. 

De  Witt,  Jean,  552. 


Index. 


607 


Diminishing  returns,  250,  251;  as  af- 
fecting productivity  of  capital,  400, 
401;  as  affecting  wages,  417,  418;  as 
related  to  the  law  of  rent,  373;  in  ag- 
riculture, 302-304;  in  mining,  305, 
306;  law  of,  211-214. 

Diminishing  utility,  212. 

Discount,  472-474. 

Discount  of  future,  relation  to  interest, 
396. 

Discrimination,  railway,  532;  as  result- 
ing from  competition,  527,  528;  local, 
536-540  J  personal,  535,  536,  543, 
544;  relation  to  classification,  532- 

535; 

Distribution,  118.  120,  122,  123;  rela- 
tion to  production,  352 ;  shares  in, 

Disutility,  190-192;  marginal,  192. 
Divorce,  165,  166. 
Domestic  system,  92,  93. 
Dynamics,  224. 


TgCONOMIC     Development    of    the 

United  States,  ch.  vii,  99-108. 
Economic  Law  and  Method,  ch.  ii,  23- 

35- 

Economic  man,  5. 

Economic  motive,  4,  5. 

Economic  society,  future  of,  597-601. 

Economic  Stages,  The,  ch.  v,  66-83. 

Economics,  art  of,  35 ;  as  a  social  sci- 
ence, 6;  Austrian  school  of,  122; 
definition  of,  4,  7,8,  13;  in  antiquity, 
109-112;  in  the  middle  ages,  112- 
115;  methods  of,  27-30;  pure  and 
applied,  34,  35 ;  relation  to  biology, 
29,  to  ethics,  32-34,  to  jurisprudence, 
31,  32,  to  politics,  31,  to  psychology, 
29 ;  role  of,  60 1,  602  ;  scope  of,  22. 

Economy,  capitalist  or  industrial,  80- 
83;  international,  81;  national,  81 ; 
self-sufficing,  74-76 ;  village,  76-79. 

Edge  worth,  F.  Y.,  466. 

Eight  hour  day,  431. 

Elkins  Law,  543. 

Emigration,  effect  on  distribution  of 
population,  55;  restrictions  upon, 
166. 

Employer's  liability,  433. 


Enclosures,  311. 

Engel,  E.,  584,  585. 

Enterprise,  281,  329;  freedom  of,  169, 
modern  regulation  of,  169. 

Enterprise  —  The  Concentration  of  Pro- 
duction, ch.  xxii,  329-350. 

Entrepreneur,  84;  characteristics  of, 
297. 

Equality,  163,  164. 

Essartage,  309. 

Ethics,  6,  32-34,  600,  601. 

Exchange,  par  of,  498,  499;  rate  of, 
497,  498,  500. 

Exogamy,  86. 

Exports,  from  the  United  States,  103; 
105  ;  relation  to  imports,  492-496, 
505,  510. 


pACTORY  laws,  43°~432,  574,  575  ? 
Factory  system,  93-95,  322,  323. 
in  America,  101,  102. 

Family,  86-89 ;  matriarchal,  85  ;  patri- 
archal, 86,  87. 

Family  budgets,  584-586;  in  America, 
585,  586. 

Fellow  servant  rule,  433. 

Feudalism,  130. 

Flying  shuttle,  93. 

Forbearance,  marginal,  as  determining 
the  rate  of  interest,  396-399 ;  as  lim- 
iting accumulation  of  capital,  407, 
408. 

Free  competition,  122. 

Freedom,  ch.  xi,  154-172; 

Freedom,  155  ;  as  a  social  concept, 
170-172;  economic,  119,  155,  163- 
170;  of  association,  167,  168 ;  of  en- 
terprise, 169;  of  occupation,  167-169; 
of  trade,  170. 

Free  silver  movement,  463-466. 

Free  trade,  123,  170,  294;  argument 
for,  510-512;  criticism  of,  512-516; 
growth  of,  501-505 ;  in  continental 
countries,  504 ;  in  Great  Britain,  503, 
504  ;  in  the  United  States,  504,  505  ; 
original  meaniaj  of  term,  501,  502. 

Fundamental  Concepts,  ch.  i,  3-22. 

Future,  discounting  of,  209-211. 

Futures,  in  commodity  market,  364- 
366 ;  in  foreign  exchange,  499,  500. 


6o8 


Index. 


QENERAL  Law  of  Value,  The,  ch. 

xvii,  260-274. 
Gens,  85. 

George,  Henry,  133. 
Gilbert's  Act,  593. 

Gold,  production  of,  462;  in  1903,  464. 
Gold  standard,  establishment  of,  461, 

465. 

Gold  point,  498,  499. 
Goods,   8;    complementary,   241;   eco- 
nomic, ir  ;  free,  n  ;  producers',  212 
Gossen,  H.  H.,  29. 
Government  and  Business,  ch.  xxxiii, 

559-578. 
Government  ownership,  541,  562-573; 

conditions  of,   562,    563,  566,    567  ; 

development  of,  562-566. 
Government    regulation,    573-575;    in 

middle   ages,  574,  575;    in   modern 

times,  574,  575. 
Green,  T.  H.,  163. 
Gresham's  law,  467. 
Guilds,  91;  decay  of,  116. 


TTALES,  116. 

Halley,  E.,  552. 
Hamilton,  Alexander,  508,  509. 
Handicraft  system,  90,  91. 
Help  system,  89,  90. 
Historical  Forms   of  Business  Enter- 
prise, The,  ch.  vi,  84-98. 


IMMIGRATION,  59,  60;  effect  on 
1  distribution  of  population,  55;  re- 
strictions upon,  166,  167. 

Immigration,  Chinese,  166,  298. 

Imports,  relation  to  exports,  492-496, 
505,  510. 

Income,  benefit  and  money,  16  ;  rela- 
tion to  capital,  15-19. 

Incomes  as  differentials,  218,  219. 

Increasing  returns,  251. 

Index  numbers,  458-460. 

Individualism,  38,  30. 

Industrial  Revolution,  94;  effect  on 
economic  science,  121. 

Industry,  localization  of,  294. 

Inheritance,  136,  137;  taxation  of,  137. 


Insurance,  ch.  xxxii,  545-558. 
Insurance,  as  diminishing  uncertainty, 

553-556;  forms  of>  552,  5535  gov- 
ernment management  of,  557,  558; 
growth  of,  548-553  ;  in  antiquity,  549; 
methods  of ,  556,557;  nature  of,  545- 
548  ;  of  the  laborer,  434  ;  origin  of, 
548-551  ;  productivity  of,  554;  regu- 
lation of,  557,  558;  theory  of,  553- 
556. 

Insurance  companies,  as  media  of  in- 
vestment, 556,  557. 

Insurance,  life,  in  the  United  States, 
552;  origin  of,  550-552. 

Insurance,  marine,  origin  of,  549,  550. 

Insurance  policies,  forms  of,  556,  557. 

Insurance    premium,    composition    of, 

55i,  552. 

Intelligence,  transmission  of,  47,  517- 
519. 

Interchangeable  parts,  324. 

Interest,  ch.  xxv,  392-410. 

Interest,  264,  352  ;  as  affected  by 
changes  in  cost  of  labor,  404,  405  ; 
as  affected  by  risk,  394,  554  ;  as  a 
discount  of  the  future,  219,  396 ;  as 
measured  by  marginal  forbearance, 
398,  399  ;  as  product  of  marginal 
capital,  402;  as  a  reward  for  forbear- 
ance, 396-399;  contract  and  econo- 
mic, 393 ;  contrasted  with  profits, 
356  ;  equivalence  to  rent,  393 ;  in 
Greece  and  Rome,  in,  112;  in  the 
middle  ages,  114;  nature  of,  392- 
395 ;  on  call  loans,  395  ;•  regulation 
of,  408-410 ;  relation  to  cost  of  pro- 
duction of  capital,  265,  266  ;  relation 
to  productivity,  399-402;  relation  to 
rent,  216 ;  tendency  to  a  minimum, 
405-408. 

Interest,  rate  of,  220,  221;  in  antiquity, 
404  ;  in  middle  ages,  404  ;  variations 
in,  403-405. 

International  Trade,  ch.  xxx,  491-516. 

International  trade,  basis  of,  491,  492. 

Interstate  Commerce  Commission,  542, 

543- 
Interstate   Commerce   Law,  349,    536, 

539,  542. 

Inventions  as  creating  profits,  355. 
Irrigation,  43. 


Index. 


609 


TEVONS,  W.  S.,  29,  122,  191,  198, 
J     483- 
Joint  cost,  as  basis   of  postal  charges, 

519;    as  basis  of    railway   charges, 

529,  53°- 
Jurisprudence,  6,  31,  32. 

]/•  ING,  Gregory,  455. 
'     Kinley,  D.,  466. 

J^ABOR,  ch.  xix,  285-299. 

Labor,  American   Federation  of, 

434- 

Labor,  combination  of,  296,  297  ;  dis- 
tinguished from  other  commodities, 
413,  414 ;  division  of,  290-296  ;  legis- 
lation in  behalf  of,  430-434,  574,  575  ; 
productive  and  unproductive,  277- 
279;  regulation  of  hours,  431  ;  stand- 
ardization of,  435-438. > 

Labor  legislation,  430-434,  574,  575. 

Labor  organizations,  434-442;  methods 
of,  439-442- 

Labor  Problem,  The,  ch.  xxvii,  429- 
447- 

Labor  theory  of  property,  132,  133. 

Laissexfairg,  123,  169,  560. 

Land,  ch.  xx,  300-312. 

Land,  280;  as  capable  of  increase  in 
quantity,  302,  303  ;  as  a  factor  in 
production,  300-303 ;  as  a  separate 
economic  category,  314;  diminishing 
returns  from,  302-304  ;  distinguished 
from  monopoly,  389;  mobility  of, 
308;  private  property  in,  128-131, 
305;  taxation  of,  303;  value  of,  260. 

Land  tenure,  383-388. 

Lands,  forest,  305  ;  mineral,  305,  306. 

Latin  Union,  465. 

Law,  economic,  23-27;  historical,  26; 
natural,  25,  26. 

Limited  liability,  96. 

List,  Friedrich,  508,  509. 

Lotteries,  564. 

Luxury,  580-584;  as  affording  employ- 
ment, 580,  581 ;  justification  of,  581- 
583  ;  socialization  of,  583. 


MACHINERY,  effect  on  labor,  299. 
Maine,  Sir  Henry,  67. 


39 


Mai  thus,  60-65. 

Margin,  economic,  177,  178. 

Market,  223. 

Marriage,  freedom  of,  165. 

Marshall,  A.,  29,  124,  194. 

Marx,  Karl,  123,  369,  562. 

Matriarchate,  85. 

Meaning  of  Value,  The,  ch.  xii,  177- 
188. 

Measure  of  Value,  The,  ch.  xiii,  189- 
203. 

Mercantile  system,  115-118,  502,  503. 

Metayer  system,  385,  442. 

Migration,  166. 

Mill,  J.  S.,  26,  476,  492,  508. 

Mir,  74-76. 

Monchretien,  117. 

Money,  ch.  xxviii,  448-468. 

Money,  contrasted  with  wealth,  19; 
credit,  457  ;  distribution  of,  467,  468, 
500,  501 ;  fiat,  453,  454;  free  coinage, 
452;  functions,  19,  449-451;  in 
middle  ages,  115;  kinds  of,  451-454; 
origin,  450,  451;  quantity  theory 
of>  454-4S6;  representative,  453; 
standard,  451,  452;  stock  of,  450; 
theory  of,  in  antiquity,  112;  token, 
452. 

Money,  value  of,  454-459;  as  depend- 
ent on  cost  of  production,  457-459; 
in  antiquity,  458;  effect  of  variations 
on  wages,  457. 

Monopolies,  fiscal  and  social,  563,  564; 
kinds  of,  152,  153;  municipal,  225; 
social,  classes  of,  564. 
Monopoly,  152,  153,  229,  238;  distin- 
guished from  concentration,  330; 
effect  on  wages,  426 ;  need  of  regu- 
lation, 350;  regulation  of,  574. 
Monopoly  price,  235,  236,  255-259, 
531;  as  limited  by  potential  com- 
petition, 368 ;  as  limited  by  substitu- 
tion, 368. 

Monopoly  profits,  366-368 ;  capitaliza- 
tion of,  367  ;  regulation  of,  368,  369. 
Monopoly  rent,  367. 
Monopoly  wages,  367,  425,  426. 
Mortality  tables,  55^. 
Morgan,  L.  H.,  72. 
Mun,  Thomas,  117. 
Municipalization,  570-573;  of  bridges, 


6io 


Index. 


567;  of  canals,  567;  of  markets  and 
docks,  566,  567 ;  of  roads,  567. 
Municipal  ownership,  570-573  ;  of  elec- 
tric lighting,  570,  571 ;  of  gas  works, 
570-572;  of  street  railways,  570- 
572;  of  water  works,  570,  571. 

RATIONALISM,  513,  514. 

Natural  Environment,   The,  ch. 

iii,  36-47. 

Natural  law,  119,  132. 
Natural  rights,  as  a  defence  of  private 

property,  132. 
Non-competing  industrial  groups,  425, 

491. 
Northern  Securities  Company,  149. 

QPEN  field  system,  129,  311. 

Open  shop,  440-442. 
Outdoor  relief,  593,  594. 
Overcapitalization,    273,  274 ;  relation 

to  crises,-  489,  490. 
Overproduction,  as  an  explanation  of 

crises,  488. 

pAPER     currency    in    the    United 

States,  478-481. 
Parcels  post,  518,  519,  567,  568. 
Partnership,  95,  96. 
Patents,  152,  153. 
Pauperism,  593,  594;    in  the  United 

States,  594. 
Payne,  E.  J.,  309. 
Physiocrats,  26,  118-121,  277,  510. 
Picketing,  439. 
Political    economy,    definition    of,    4; 

origin  of  term,  7. 
Politics,  6,  30,  31. 
Pools,  97,  338,  339. 
Poor  laws,  593,  594.  ^ 
Population,  The,  ch.  iv,  48-65. 
Population,  concentration   of,    51,   52; 

density   of,   48-5 1 ;    distribution  of, 

53-57;  law  of,  60-65;  migration  of, 

59,  60. 

Postal  charges,  principle  of,  519. 
Post-office,   517-519;  as  a  government 

monopoly,  567,  568. 
Poverty,  584-601 ;  causes  of,  588-591 ; 

modern,  as   compared  with   that  of 


earlier  times,  591 ;  prevention  of, 
594-597;  relief  of,  591-594;  reme- 
dies for,  591-597. 

Poverty  and  Progress,  ch.  xxxiv,  579- 
602. 

Power,  transmission  of,  46. 

Precious  metals,  changes  in  value  of, 
461-463. 

Price,  184,  185;  as  affected  by  com- 
bination, 347;  customary,  113;  de- 
mand and  supply,  237;  just,  113, 
114,  150;  market,  223,  224;  monop- 
oly, 235,  236,  253-259,  368,  531  ; 
natural,  224;  regulation  of,  271;  re- 
lation to  cost  of  production,  243, 
244;  relation  to  marginal  cost,  378; 
relation  to  rent,  376-379. 

Price,  normal,  223,  224;  relation  to 
cost  of  production,  253,  254;  relation 
to  joint  cost,  251-253;  relation  to 
marginal  cost,  246,  247. 

Prices,  movement  of,  460. 

Private  Property,  ch.  ix,  125-138. 

Private  property,  historical  origin,  25, 
125-128;  limits,  134-136;  theories 

of,  i3I-I34- 
Private    property    in    land,    128-131; 

justification  of,  305. 
Production,  factors  of,  280-282;   large 

scale,  331-337;  meaning  of,  275,  276; 

relation   to   consumption,    276,   277, 

283,    287;    relation    to    distribution, 

352- 

Productions  of  the  United  States,  103- 
105. 

Profits,  ch.  xxiii,  351-370. 

Profits,  237,  238,  352;  agricultural, 
383,  384;  aleatory,  357-359?  as  anni- 
hilated by  competition,  356,  357;  as 
a  differential,  353,  354;  as  a  result  of 
price,  357;  contrasted  with  interest, 
356;  contrasted  with  wages,  357; 
industrial  and  pecuniary,  358,  359; 
instability  of,  355,  356;  justification 
of,  368-37°;  monopoly,  356-358; 
normal,  353;  ordinary,  353-357;  re- 
lation to  rent,  374-376;  relation  to 
wages,  347;  speculative,  359-366. 

Profit-sharing,  442-445. 

Property,  19. 

Property  rights,  136-138. 


Index. 


611 


Protection,  502,  503 ;  arguments  against, 
510-512;  arguments  for,  505-510; 
criticism  of,  512-516;  influence  on 
wages,  506-508;  in  the  United  States, 
504,  565,  515,  516;  recrudescence  of, 
504,  505. 

Protective  tariff,  101. 

Public  ownership,  conditions  of,  562, 
563,  566,  567;  development  of,  562- 
566. 


QUESNAY,  120. 

"D  A1LWAYS,  102;  as  quasi-public 
enterprises,  149,  150,  524-528; 
basis  of  valuation,  272,  273;  competi- 
tion among,  149,  526-528;  consoli- 
dation, 521,  525;  cost  of,  520,  521; 
development  of,  520;  government 
ownership,  541,  564,  569,  570;  in 
the  United  States,  520-525 ;  regula- 
tion of,  349,  542-544;  tendency 
toward  monopoly,  521,  524-528. 

Railway  charges,  analogy  with  taxation, 
531 ;  influence  on  combination,  341, 
342  ;  in  the  United  States,  524;  prin- 
ciple of,  252,  528-533. 

Railway  discrimination,  535-540,  543, 
544- 

Railway  rebates,  536,  543 ;  effect  on 
combination,  346. 

Raymond,  D.,  508,  509. 

Relief,  outdoor,  594. 

Rent,  ch.  xxiv.  371-391. 

Rent,  352;  as  affected  by  agricultural 
improvements,  382,  383 ;  as  depend- 
ent on  the  law  of  diminishing  returns, 
373;  as  a  _diffgr£nj:ialn  income,  2 1 7. 
2I8,  373,  374;  consumers',  194;  con- 
tract and  economic,  384-387 ;  land  and 
ground,  379,  380  ;  monopoly,  367 ; 
nature  of,  371,  373;  relation  to  in- 
terest, 216,  393;  relation  to  price, 
376-379;  relation  to  profit,  374-376; 
traditional  use  of  term,  205 . 

Rent  of  land,  372,  373;  growth  of, 
380-383  ;  justification,  388-391  ;  tra- 
ditional law  of,  373. 

Ricardo,  121-123, 198,  492. 


Risk,  546-548;  cost  of,  553,  554;  effect 
upon  interest  rates,  394 ;  increase  of, 
in  modern  times,  548 ;  methods  of 
avoiding,  547,  548. 

Rowntree,  R.  S.,  587. 


QCIENCE,  effect  on  economic  life, 
601. 

Seigniorage,  453. 

Serfdom,  159,  160. 

Serra,  117. 

Services,  9,  10. 

Share  system,  385. 

Sherman  Act,  464,  465. 

Shipping  subsidies,  577,  578. 

Short  haul  principle,  539,  540. 

Silver,  fall  in  value,  463 ;  free  coinage, 
452  ;  production,  462,  464. 

Single  tax,  390. 

Single  taxers,  388. 

Sinking  fund,  208. 

Slavery,  298;  decay  of,  158-162;  de- 
pendence on  free  land,  157,  158;  in 
America,  157, 158, 160,  161 ;  in  Rome, 
157,158;  origin,  154-158  ;  traditional 
defence  of,  162. 

Smith,  Adam,  116,  118-121,  294,  314, 
424,  510. 

Social  economics,  7. 

Socialism,  64,  136,  559-562  ;  as  a 
remedy  for  poverty,  595 ;  attitude 
toward  labor,  386  ;  attitude  toward 
profits,  369,  370;  attitude  toward 
rent,  388. 

Social  science,  6. 

Social  solidarity,  164. 

Sociology,  6. 

Specialization,  292,  295. 

Speculation,    359-366;    regulation    of, 

369- 

Spencer,  Herbert,  67,  163,  290. 
Spinning  frame,  93. 
Spinning  jenny,  93. 
Spinning  mule,  93. 
Standard  of  life,  as  determining  wages, 

419-421. 

Standardization  of  industry,  323. 
Staple,  502. 
Statics,  224. 
Statistics,  30. 


6l2 


Index. 


Steam  engine,  93. 

Stocks,  kinds  of,  326,  327. 

Stock-watering,  273,  274. 

Strikes,  439,  440. 

Subsidies,  577,  578. 

Substitution,  principle  of,  142 ;  as  limit- 
ing monopoly  price,  368. 

Sumptuary  laws,  168. 

Supply,  elasticity  of,  249-251;  forces 
regulating,  190;  joint,  251-253;  nor- 
mal, 242-244. 

Surplus,  194-198,  201-203;  consumers', 
194,  i95>  237,  238;  producers',  194. 


'-pABULAR  standard,  466. 

Tariff,  in  continental  countries,  504 ; 
in  Great  Britain,  504,  505;  in  the 
United  States,  504,  505;  influence 
on  combinations,  341,342;  origin  of 
term,  502;  relation  to  trusts,  349, 

35°,  515. 

Taxation,  absorption  of,  270;  capitaliza- 
tion, 269,  270;  diffusion,  268,  269; 
of  corporations,  267,  268 ;  of  general 
property,  268;  of  inheritance,  137; 
of  land,  303  ;  shifting  of,  269. 

Telegraph,  basis  of  charges,  519;  gov- 
ernment ownership  of,  564,  568,  569. 

Telephone,  basis  of  charges,  519;  gov- 
ernment ownership  of,  564,  568,  569. 

Tenancy,  systems  of,  385,  386. 

Theory,  alleged  antithesis  to  practice, 
27. 

Three  field  system,  311. 

Tontine  annuity,  551. 

Totem,  86. 

Trade  routes,  importance  of,  in  antiq- 
uity and  middle  ages,  598. 

Trades  unions,  167,  168,  434-442;  as 
restricting  membership,  296;  as  re- 
stricting output,  438;  functions  of, 
435 ;  jurisdictional  disputes,  437  ;  jus- 
tification of,  434,  435. 

Transportation,  ch.  xxxi,  517-544. 

Transportation,  effect  of  improvements 
in,  45,  46  ;  productivity  of,  554. 

Truck  system,  432. 

Trust,  origin  of  term,  339. 

Trusts,  98,  153;  effect  of,  on  prices, 
347,  on  producer  of  raw  material, 


346,  347>  on  wages,  344,  345 ;  relation 

to  tariff,  349,  350. 
Turgot,  1 1 6,  120. 
Two  field  system,  310. 


UNDERCONSUMPTION,    as   an 

explanation  of  crises,  488. 

Unearned  increment,  390. 

Unfair  list,  440. 

Union  label,  440. 

United  States  Steel  Corporation,  342- 
344,  348. 

Usury,  114,  408-410;  prohibition  of, 
575; 

Utilities,  classification  of,  278,  279; 
law  of  comparative,  225,  226. 

Utility,  175,  176;  as  the  cause  of  value, 
201;  definition  of,  8;  final,  176;  in- 
direct, 193;  law  of  diminishing,  175, 
176;  marginal,  175-177,  262,  263; 
social,  equivalence  with  social  cost, 
197,  198 ;  total,  176,  177. 

Utilization,  margin  of,  213,  214. 


TfALUE,  as  a  differential,  217,  218; 
as  a  social  phenomenon,  389,  390 ; 
as  dependent  on  limitation,  199;  as 
dependent  on  marginal  increments  of 
utility,  186,  187;  as  dependent  on 
social  cost,  193;  as  dependent  on 
social  marginal  utility,  188;  capital 
and  rental,  206,  207;  definition  of, 
ii ;  individual  and  social,  179-182; 
labor  theory  of,  in  middle  ages,  1 14 ; 
market,  230-238;  normal,  247-249; 
objective,  182,  183;  of  land,  260;  of 
non-reproducible  goods,  260,  261 ;  of 
privileges  and  franchises,  261,  262; 
of  producers'  goods,  212 ;  original 
meaning  of  term,  173-175;  relation 
to  cost,  190,  198,  199,  263,  264,  419; 
relation  to  marginal  utility,  179,  262, 
263,  266 ;  relation  to  rent,  204-206 ; 
social  nature  of,  193;  subjective, 
182,  183 ;  ultimate  explanation  of, 
266. 

Value  in  exchange,  182-184. 

Value  in  use,  182. 


Index. 


613 


TXf  AGES,  ch.  xxvi,  411-428. 

Wages,  264,  352;  as  affected  by 
changes  in  supply  of  capital,  421, 
422  ;  as  affected  by  changes  in  supply 
of  land,  421,  422;  as  affected  by 
combination,  344,  345  ;  as  affected 
by  diminishing  returns,  417,  418; 
as  affected  by  monopoly,  426 ;  as 
affected  by  protection,  506-508  ;  as 
affected  by  variations  in  the  value  of 
money,  457;  as  determined  by  de- 
mand and  supply,  414,  415;  as  a 
rent,  377 ;  compared  with  rent  and 
interest,  411,  412;  contrasted  with 
prices  of  commodities,  413,  414;  con- 
trasted with  profits,  357  ;  dependence 
on  efficiency  of  labor,  289,  290 ;  de- 
pendence on  marginal  productivity, 
416-418;  general  rate  of,  412,  413; 
iron  law,  415  ;  minimum  laws  in  Aus- 
tralasia, 432,  574;  minimum  subsist- 
ence theory,  415;  money  and  real, 
4!3>  423>  424;  monopoly,  367,  425, 


426;  nature  of,  411-414;  rate  of,  and 
cost  of  production,  287,  288,  507; 
relation  to  cost  of  production  of  labor, 
265,  266,  414-416  ;  relation  to  profits, 
427;  Ricardian  doctrine  of,  122  ;  rise 
of,  in  the  United  States,  422,  423; 
standard  rate,  435,  436;  women's, 
420. 

Wages  fund,  64,  415,  416. 

Walker,  F.  A.,  124. 

Walsh,  C.  M.,  466. 

Wealth,  as  consisting  of  services,  10; 
characteristics  of,  8,  9,  12  ;  contrasted 
with  money,  19;  contrasted  with 
property,  19,  20 ;  intangible,  9 ; 
marginal  increments  of,  185-188; 
measured  by  income,  19  ;  public  and 
private,  20-22. 

Women's  wages,  420. 

Working  day,  normal,  as  an  object  of 
trade  union  activity,  436,  437. 

Workmen's  Compensation  Act,  433. 


•18  4470 


vvr^yfnj 


